UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~June~~September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file numbers: 001-34465 ~~and~~ ~~001-31441~~

SELECT MEDICAL HOLDINGS CORPORATION

~~SELECT MEDICAL CORPORATION~~

(Exact name of Registrant as specified in its Charter)



Delaware		20-1764048
~~Delaware~~		~~23-2872718~~
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

4714 Gettysburg Road, P.O. Box 2034

Mechanicsburg, PA 17055

(Address of Principal Executive Offices and Zip code)

(717) 972-1100

(~~Registrants’~~Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	SEM	New York Stock Exchange
		(NYSE)

Indicate by check mark whether the ~~Registrants~~Registrant (1) ~~have~~has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as such ~~Registrants were~~Registrant was required to file such reports), and (2) ~~have~~has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the ~~Registrants have~~Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the ~~Registrants were~~Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant ~~Select Medical Holdings Corporation,~~ is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant ~~Select Medical Corporation,~~ is a ~~large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting~~shell company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



~~Large accelerated filer~~	☐	~~Accelerated filer~~	☐
~~Non-accelerated filer~~	☒	~~Smaller reporting company~~	☐
		~~Emerging Growth Company~~	☐

~~Indicate by check mark whether the Registrants are shell companies~~ (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~July~~October 31, 2019, Select Medical Holdings Corporation had outstanding ~~135,620,857~~134,326,112 shares of common stock.

~~This Form 10-Q is a combined quarterly report being filed separately by two Registrants: Select Medical Holdings Corporation and Select Medical Corporation.~~ Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Select Medical Holdings Corporation and any reference to “Select” refers to Select Medical Corporation, the wholly owned operating subsidiary of Holdings, and any of Select’s subsidiaries. Any reference to “Concentra” refers to Concentra ~~Inc., the indirect operating subsidiary of Concentra~~ Group Holdings Parent, LLC (“Concentra Group Holdings Parent”), and its ~~subsidiaries.~~subsidiaries, including Concentra Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Holdings, Select, and ~~Concentra Group Holdings Parent and its subsidiaries.~~Concentra.

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION	3

ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Condensed consolidated balance sheets	3

	Condensed consolidated statements of operations	4

	Condensed consolidated statements of changes in equity and income	6

	Condensed consolidated statements of cash flows	8

	Notes to condensed consolidated financial statements	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3629

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5650

ITEM 4.	CONTROLS AND PROCEDURES	5650

PART II	OTHER INFORMATION	5751

ITEM 1.	LEGAL PROCEEDINGS	5751

ITEM 1A.	RISK FACTORS	5953

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5953

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	5953

ITEM 4.	MINE SAFETY DISCLOSURES	5953

ITEM 5.	OTHER INFORMATION	5953

ITEM 6.	EXHIBITS	6054

SIGNATURES

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Select Medical Holdings Corporation

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)


	Select Medical Holdings Corporation				Select Medical Corporation
	December 31, 2018		June 30, 2019		December 31, 2018			June 30, 2019			December 31, 2018		September 30, 2019
ASSETS
Current Assets:
Cash and cash equivalents	$	175,178	$	124,036	$	175,178		$	124,036		$	175,178	$	135,963
Accounts receivable	706,676		791,769		706,676			791,769			706,676		798,805
Prepaid income taxes	20,539		12,318		20,539			12,318			20,539		18,804
Other current assets	90,131		99,942		90,131			99,942			90,131		96,721
Total Current Assets	992,524		1,028,065		992,524			1,028,065			992,524		1,050,293
Operating lease right-of-use assets	—		971,385		—			971,385			—		986,519
Property and equipment, net	979,810		1,008,555		979,810			1,008,555			979,810		997,467
Goodwill	3,320,726		3,385,394		3,320,726			3,385,394			3,320,726		3,382,656
Identifiable intangible assets, net	437,693		419,335		437,693			419,335			437,693		415,763
Other assets	233,512		294,206		233,512			294,206			233,512		322,058
Total Assets	$	5,964,265	$	7,106,940	$	5,964,265		$	7,106,940		$	5,964,265	$	7,154,756
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	25,083	$	27,259	$	25,083		$	27,259		$	25,083	$	—
Current operating lease liabilities	—		202,484		—			202,484			—		204,936
Current portion of long-term debt and notes payable	43,865		9,012		43,865			9,012			43,865		15,656
Accounts payable	146,693		138,015		146,693			138,015			146,693		136,801
Accrued payroll	172,386		147,397		172,386			147,397			172,386		170,294
Accrued vacation	110,660		122,277		110,660			122,277			110,660		119,286
Accrued interest	12,137		10,234		12,137			10,234			12,137		10,112
Accrued other	190,691		184,247		190,691			184,247			190,691		209,887
Income taxes payable	3,671		11,767		3,671			11,767			3,671		2,815
Total Current Liabilities	705,186		852,692		705,186			852,692			705,186		869,787
Non-current operating lease liabilities	—		813,903		—			813,903			—		836,205
Long-term debt, net of current portion	3,249,516		3,349,702		3,249,516			3,349,702			3,249,516		3,336,506
Non-current deferred tax liability	153,895		147,716		153,895			147,716			153,895		147,567
Other non-current liabilities	158,940		102,555		158,940			102,555			158,940		105,251
Total Liabilities	4,267,537		5,266,568		4,267,537			5,266,568			4,267,537		5,295,316
Commitments and contingencies (Note 13)
Redeemable non-controlling interests	780,488		844,422		780,488			844,422			780,488		953,697
Stockholders’ Equity:
Common stock of Holdings, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 134,563,999 shares issued and outstanding at 2018 and 2019, respectively	135		135		—			—
Common stock of Select, $0.01 par value, 100 shares issued and outstanding	—		—		0			0
Common stock, $0.001 par value, 700,000,000 shares authorized, 135,265,864 and 134,171,529 shares issued and outstanding at 2018 and 2019, respectively											135		134
Capital in excess of par	482,556		492,569		970,156			988,333			482,556		485,415
Retained earnings (accumulated deficit)	320,351		353,305		(167,114		)	(142,324		)
Total Select Medical Holdings Corporation and Select Medical Corporation Stockholders’ Equity	803,042		846,009		803,042			846,009
Retained earnings											320,351		269,169
Total Stockholders’ Equity											803,042		754,718
Non-controlling interests	113,198		149,941		113,198			149,941			113,198		151,025
Total Equity	916,240		995,950		916,240			995,950			916,240		905,743
Total Liabilities and Equity	$	5,964,265	$	7,106,940	$	5,964,265		$	7,106,940		$	5,964,265	$	7,154,756

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	Select Medical Holdings Corporation						Select Medical Corporation
	For the Three Months Ended June 30,						For the Three Months Ended June 30,						For the Three Months Ended September 30,
	2018			2019			2018			2019			2018			2019
Net operating revenues	$	1,296,210		$	1,361,364		$	1,296,210		$	1,361,364		$	1,267,401		$	1,393,343
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	1,094,731			1,150,150			1,094,731			1,150,150			1,087,062			1,183,111
General and administrative	29,194			31,339			29,194			31,339			29,975			34,385
Depreciation and amortization	51,724			54,993			51,724			54,993			50,527			52,941
Total costs and expenses	1,175,649			1,236,482			1,175,649			1,236,482			1,167,564			1,270,437
Income from operations	120,561			124,882			120,561			124,882			99,837			122,906
Other income and expense:
Loss on early retirement of debt													—			(18,643		)
Equity in earnings of unconsolidated subsidiaries	4,785			7,394			4,785			7,394			5,432			6,950
Non-operating gain	6,478			—			6,478			—
Gain on sale of businesses (Note 5)													2,139			—
Interest expense	(50,159		)	(51,464		)	(50,159		)	(51,464		)	(50,669		)	(54,336		)
Income before income taxes	81,665			80,812			81,665			80,812			56,739			56,877
Income tax expense	21,106			20,826			21,106			20,826			14,060			12,847
Net income	60,559			59,986			60,559			59,986			42,679			44,030
Less: Net income attributable to non-controlling interests	14,048			15,170			14,048			15,170			9,762			13,298
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	46,511		$	44,816		$	46,511		$	44,816
Net income attributable to Select Medical Holdings Corporation													$	32,917		$	30,732
Earnings per common share (Note 12):
Basic	$	0.35		$	0.33								$	0.24		$	0.23
Diluted	$	0.35		$	0.33								$	0.24		$	0.23

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except per share amounts)


	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,						For the Nine Months Ended September 30,
	2018			2019			2018			2019			2018			2019
Net operating revenues	$	2,549,174		$	2,685,995		$	2,549,174		$	2,685,995		$	3,816,575		$	4,079,338
Costs and expenses:
Cost of services, exclusive of depreciation and amortization	2,160,544			2,282,242			2,160,544			2,282,242			3,247,606			3,465,353
General and administrative	60,976			60,016			60,976			60,016			90,951			94,401
Depreciation and amortization	98,495			107,131			98,495			107,131			149,022			160,072
Total costs and expenses	2,320,015			2,449,389			2,320,015			2,449,389			3,487,579			3,719,826
Income from operations	229,159			236,606			229,159			236,606			328,996			359,512
Other income and expense:
Loss on early retirement of debt	(10,255		)	—			(10,255		)	—			(10,255		)	(18,643		)
Equity in earnings of unconsolidated subsidiaries	9,482			11,760			9,482			11,760			14,914			18,710
Non-operating gain	6,877			6,532			6,877			6,532
Gain on sale of businesses (Note 5)													9,016			6,532
Interest expense	(97,322		)	(102,275		)	(97,322		)	(102,275		)	(147,991		)	(156,611		)
Income before income taxes	137,941			152,623			137,941			152,623			194,680			209,500
Income tax expense	33,400			39,293			33,400			39,293			47,460			52,140
Net income	104,541			113,330			104,541			113,330			147,220			157,360
Less: Net income attributable to non-controlling interests	24,291			27,680			24,291			27,680			34,053			40,978
Net income attributable to Select Medical Holdings Corporation and Select Medical Corporation	$	80,250		$	85,650		$	80,250		$	85,650
Net income attributable to Select Medical Holdings Corporation													$	113,167		$	116,382
Earnings per common share (Note 12):
Basic	$	0.60		$	0.63								$	0.84		$	0.86
Diluted	$	0.60		$	0.63								$	0.84		$	0.86

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)


	For the Six Months Ended June 30, 2019																			For the Nine Months Ended September 30, 2019

	Select Medical Holdings Corporation Stockholders																					Total Stockholders’ Equity
	Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity			Common Stock Issued		Common Stock Par Value			Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2018	135,266		$	135	$	482,556		$	320,351		$	803,042		$	113,198		$	916,240		135,266		$	135		$	482,556		$	320,351		$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Holdings Corporation								40,834			40,834						40,834											40,834			40,834						40,834
Net income attributable to non-controlling interests											—			4,810			4,810														—			4,810			4,810
Issuance of restricted stock	21		0		0						—						—			21		0			0						—						—
Forfeitures of unvested restricted stock	(24	)	0		0						—						—			(24	)	0			0						—						—
Vesting of restricted stock					5,488						5,488						5,488								5,488						5,488						5,488
Issuance of non-controlling interests											—			6,837			6,837														—			6,837			6,837
Distributions to and purchases of non-controlling interests					259						259			(2,739		)	(2,480		)						259						259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests								(47,470		)	(47,470		)				(47,470		)									(47,470		)	(47,470		)				(47,470		)
Other								(122		)	(122		)	413			291											(122		)	(122		)	413			291
Balance at March 31, 2019	135,263		$	135	$	488,303		$	313,593		$	802,031		$	122,519		$	924,550		135,263		$	135		$	488,303		$	313,593		$	802,031		$	122,519		$	924,550
Net income attributable to Select Medical Holdings Corporation								44,816			44,816						44,816											44,816			44,816						44,816
Net income attributable to non-controlling interests											—			3,663			3,663														—			3,663			3,663
Issuance of restricted stock	187		0		0						—						—			187		0			0						—						—
Vesting of restricted stock					5,591						5,591						5,591								5,591						5,591						5,591
Repurchase of common shares	(936	)	0		(8,164		)	(5,456		)	(13,620		)				(13,620		)	(936	)	0			(8,164		)	(5,456		)	(13,620		)				(13,620		)
Exercise of stock options	50		0		459						459						459			50		0			459						459						459
Issuance of non-controlling interests					6,366						6,366			24,761			31,127								6,366						6,366			24,761			31,127
Distributions to and purchases of non-controlling interests					14						14			(1,430		)	(1,416		)						14						14			(1,430		)	(1,416		)
Redemption adjustment on non-controlling interests								270			270						270											270			270						270
Other								82			82			428			510											82			82			428			510
Balance at June 30, 2019	134,564		$	135	$	492,569		$	353,305		$	846,009		$	149,941		$	995,950		134,564		$	135		$	492,569		$	353,305		$	846,009		$	149,941		$	995,950
Net income attributable to Select Medical Holdings Corporation																												30,732			30,732						30,732
Net income attributable to non-controlling interests																															—			7,202			7,202
Issuance of restricted stock																				1,069		1			(1		)				—						—
Forfeitures of unvested restricted stock																				(12	)	0			0						—						—
Vesting of restricted stock																									6,050						6,050						6,050
Repurchase of common shares																				(1,494	)	(2		)	(13,616		)	(10,071		)	(23,689		)				(23,689		)
Exercise of stock options																				45		0			413						413						413
Distributions to and purchases of non-controlling interests																															—			(6,538		)	(6,538		)
Redemption adjustment on non-controlling interests																												(104,553		)	(104,553		)				(104,553		)
Other																												(244		)	(244		)	420			176
Balance at September 30, 2019																				134,172		$	134		$	485,415		$	269,169		$	754,718		$	151,025		$	905,743

The accompanying notes are an integral part of these condensed consolidated financial statements.

Select Medical Holdings Corporation

Condensed Consolidated Statements of Changes in Equity and Income

(unaudited)

(in thousands)


	For the Six Months Ended June 30, 2018																			For the Nine Months Ended September 30, 2018

	Select Medical Holdings Corporation Stockholders																					Total Stockholders’ Equity
	Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity			Common Stock Issued		Common Stock Par Value		Capital in Excess of Par			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2017	134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604		134,115		$	134	$	463,499		$	359,735		$	823,368		$	109,236		$	932,604
Net income attributable to Select Medical Holdings Corporation								33,739			33,739						33,739										33,739			33,739						33,739
Net income attributable to non-controlling interests											—			4,500			4,500													—			4,500			4,500
Issuance of restricted stock	4		0		0						—						—			4		0		0						—						—
Forfeitures of unvested restricted stock	(88	)	0		0						—						—			(88	)	0		0						—						—
Vesting of restricted stock					4,717						4,717						4,717							4,717						4,717						4,717
Repurchase of common shares	(7	)	0		(69		)	(53		)	(122		)				(122		)	(7	)	0		(69		)	(53		)	(122		)				(122		)
Exercise of stock options	80		0		738						738						738			80		0		738						738						738
Issuance and exchange of non-controlling interests								74,341			74,341						74,341										74,341			74,341						74,341
Distributions to and purchases of non-controlling interests								(83,233		)	(83,233		)	(1,094		)	(84,327		)								(83,233		)	(83,233		)	(1,094		)	(84,327		)
Redemption adjustment on non-controlling interests								(1,051		)	(1,051		)				(1,051		)								(1,051		)	(1,051		)				(1,051		)
Other								103			103			35			138										103			103			35			138
Balance at March 31, 2018	134,104		$	134	$	468,885		$	383,581		$	852,600		$	112,677		$	965,277		134,104		$	134	$	468,885		$	383,581		$	852,600		$	112,677		$	965,277
Net income attributable to Select Medical Holdings Corporation								46,511			46,511						46,511										46,511			46,511						46,511
Net income attributable to non-controlling interests											—			3,139			3,139													—			3,139			3,139
Issuance of restricted stock	170		0		0						—						—			170		0		0						—						—
Vesting of restricted stock					4,845						4,845						4,845							4,845						4,845						4,845
Repurchase of common shares	(42	)	0		(421		)	(346		)	(767		)				(767		)	(42	)	0		(421		)	(346		)	(767		)				(767		)
Exercise of stock options	95		0		882						882						882			95		0		882						882						882
Issuance and exchange of non-controlling interests					1,553						1,553			1,921			3,474							1,553						1,553			1,921			3,474
Distributions to and purchases of non-controlling interests					(932		)	(384		)	(1,316		)	(1,958		)	(3,274		)					(932		)	(384		)	(1,316		)	(1,958		)	(3,274		)
Redemption adjustment on non-controlling interests								(8,500		)	(8,500		)				(8,500		)								(8,500		)	(8,500		)				(8,500		)
Other								(337		)	(337		)	677			340										(337		)	(337		)	677			340
Balance at June 30, 2018	134,327		$	134	$	474,812		$	420,525		$	895,471		$	116,456		$	1,011,927		134,327		$	134	$	474,812		$	420,525		$	895,471		$	116,456		$	1,011,927
Net income attributable to Select Medical Holdings Corporation																											32,917			32,917						32,917
Net income attributable to non-controlling interests																														—			518			518
Issuance of restricted stock																				1,048		1		(1		)				—						—
Vesting of restricted stock																								5,497						5,497						5,497
Repurchase of common shares																				(236	)	0		(2,499		)	(2,252		)	(4,751		)				(4,751		)
Exercise of stock options																				1		0		13						13						13
Distributions to and purchases of non-controlling interests																														—			(4,419		)	(4,419		)
Redemption adjustment on non-controlling interests																											(154,514		)	(154,514		)				(154,514		)
Other																											(41		)	(41		)	421			380
Balance at September 30, 2018																				135,140		$	135	$	477,822		$	296,635		$	774,592		$	112,976		$	887,568

The accompanying notes are an integral part of these condensed consolidated financial statements.

~~Condensed Consolidated Statements of Changes in Equity and Income (Continued)~~

~~(unaudited)~~

~~(in thousands)~~

For the Six Months Ended June 30, 2019

Select Medical Corporation Stockholders

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par
Accumulated Deficit Total Stockholders’ Equity
Non-controlling
Interests

Total
Equity
Balance at December 31, 2018 0
$ 0
$ 970,156
$ (167,114 ) $ 803,042
$ 113,198
$ 916,240
Net income attributable to Select Medical Corporation

40,834
40,834

40,834
Net income attributable to non-controlling interests

—
4,810
4,810
Contribution related to restricted stock award issuances by Holdings

5,488

5,488

5,488
Issuance of non-controlling interests —
6,837
6,837
Distributions to and purchases of non-controlling interests

259

259
(2,739 ) (2,480 )
Redemption adjustment on non-controlling interests

(47,470 ) (47,470 )
(47,470 )
Other

(122 ) (122 ) 413
291
Balance at March 31, 2019 0
$ 0
$ 975,903
$ (173,872 ) $ 802,031
$ 122,519
$ 924,550
Net income attributable to Select Medical Corporation

44,816
44,816
44,816
Net income attributable to non-controlling interests —
3,663
3,663
Additional investment by Holdings 459

459
459
Dividends declared and paid to Holdings
(13,620 ) (13,620 ) (13,620 )
Contribution related to restricted stock award issuances by Holdings

5,591

5,591
5,591
Issuance of non-controlling interests 6,366
6,366
24,761
31,127
Distributions to and purchases of non-controlling interests

14
14
(1,430 ) (1,416 )
Redemption adjustment on non-controlling interests

270
270

270
Other

82
82
428
510
Balance at June 30, 2019 0
$ 0
$ 988,333
$ (142,324 ) $ 846,009
$ 149,941
$ 995,950

For the Six Months Ended June 30, 2018

Select Medical Corporation Stockholders

Common
Stock
Issued

Common
Stock
Par Value

Capital in
Excess
of Par
Accumulated Deficit Total Stockholders’ Equity
Non-controlling
Interests

Total
Equity
Balance at December 31, 2017 0
$ 0
$ 947,370
$ (124,002 ) $ 823,368
$ 109,236
$ 932,604
Net income attributable to Select Medical Corporation

33,739
33,739

33,739
Net income attributable to non-controlling interests

—
4,500
4,500
Additional investment by Holdings

738

738

738
Dividends declared and paid to Holdings

(122 ) (122 )
(122 )
Contribution related to restricted stock award issuances by Holdings

4,717

4,717

4,717
Issuance and exchange of non-controlling interests 74,341
74,341
74,341
Distributions to and purchases of non-controlling interests

(83,233 ) (83,233 ) (1,094 ) (84,327 )
Redemption adjustment on non-controlling interests

(1,051 ) (1,051 )
(1,051 )
Other

103
103
35
138
Balance at March 31, 2018 0
$ 0
$ 952,825
$ (100,225 ) $ 852,600
$ 112,677
$ 965,277
Net income attributable to Select Medical Corporation 46,511
46,511
46,511
Net income attributable to non-controlling interests —
3,139
3,139
Additional investment by Holdings 882
882
882
Dividends declared and paid to Holdings (767 ) (767 ) (767 )
Contribution related to restricted stock award issuances by Holdings 4,845
4,845
4,845
Issuance and exchange of non-controlling interests 1,553
1,553
1,921
3,474
Distributions to and purchases of non-controlling interests (932 ) (384 ) (1,316 ) (1,958 ) (3,274 )
Redemption adjustment on non-controlling interests (8,500 ) (8,500 ) (8,500 )
Other (337 ) (337 ) 677
340
Balance at June 30, 2018 0
$ 0
$ 959,173
$ (63,702 ) $ 895,471
$ 116,456
$ 1,011,927

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

Select Medical Holdings Corporation

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Select Medical Holdings Corporation						Select Medical Corporation
	For the Six Months Ended June 30,						For the Six Months Ended June 30,						For the Nine Months Ended September 30,
	2018			2019			2018			2019			2018			2019
Operating activities
Net income	$	104,541		$	113,330		$	104,541		$	113,330		$	147,220		$	157,360
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from unconsolidated subsidiaries	7,830			11,148			7,830			11,148			10,734			13,609
Depreciation and amortization	98,495			107,131			98,495			107,131			149,022			160,072
Provision for bad debts	102			1,958			102			1,958			(373		)	2,344
Equity in earnings of unconsolidated subsidiaries	(9,482		)	(11,760		)	(9,482		)	(11,760		)	(14,914		)	(18,710		)
Loss on extinguishment of debt	484			—			484			—			484			10,160
Gain on sale of assets and businesses	(6,980		)	(6,354		)	(6,980		)	(6,354		)	(9,129		)	(6,349		)
Stock compensation expense	10,911			12,613			10,911			12,613			17,175			19,431
Amortization of debt discount, premium and issuance costs	6,486			6,326			6,486			6,326			9,845			9,469
Deferred income taxes	(1,691		)	(6,290		)	(1,691		)	(6,290		)	(2,092		)	(7,247		)
Changes in operating assets and liabilities, net of effects of business combinations:
Accounts receivable	(5,774		)	(85,873		)	(5,774		)	(85,873		)	23,495			(93,425		)
Other current assets	(3,011		)	(9,236		)	(3,011		)	(9,236		)	(10,274		)	(6,016		)
Other assets	6,684			(939		)	6,684			(939		)	4,828			1,259
Accounts payable	(5,462		)	2,670			(5,462		)	2,670			(3,507		)	1,369
Accrued expenses	1,207			(18,156		)	1,207			(18,156		)	49,391			22,396
Income taxes	12,610			16,346			12,610			16,346			9,072			918
Net cash provided by operating activities	216,950			132,914			216,950			132,914			380,977			266,640
Investing activities
Business combinations, net of cash acquired	(517,704		)	(86,062		)	(517,704		)	(86,062		)	(519,258		)	(86,269		)
Purchases of property and equipment	(81,648		)	(89,285		)	(81,648		)	(89,285		)	(121,039		)	(123,956		)
Investment in businesses	(3,291		)	(52,257		)	(3,291		)	(52,257		)	(12,936		)	(60,668		)
Proceeds from sale of assets and businesses	6,672			125			6,672			125			6,691			183
Net cash used in investing activities	(595,971		)	(227,479		)	(595,971		)	(227,479		)	(646,542		)	(270,710		)
Financing activities
Borrowings on revolving facilities	265,000			635,000			265,000			635,000			420,000			700,000
Payments on revolving facilities	(345,000		)	(460,000		)	(345,000		)	(460,000		)	(585,000		)	(720,000		)
Proceeds from term loans	779,904			—			779,904			—			779,904			593,683
Payments on term loans	(5,750		)	(132,685		)	(5,750		)	(132,685		)	(8,625		)	(375,084		)
Proceeds from 6.250% senior notes													—			539,176
Payment on 6.375% senior notes													—			(710,000		)
Revolving facility debt issuance costs	(1,333		)	—			(1,333		)	—			(1,333		)	(310		)
Borrowings of other debt	19,928			14,230			19,928			14,230			30,134			19,282
Principal payments on other debt	(11,521		)	(12,680		)	(11,521		)	(12,680		)	(17,971		)	(22,628		)
Repurchase of common stock	(889		)	(13,620		)	—			—			(5,640		)	(37,309		)
Dividends paid to Holdings	—			—			(889		)	(13,620		)
Proceeds from exercise of stock options	1,620			459			—			—			1,633			872
Equity investment by Holdings	—			—			1,620			459
Increase (decrease) in overdrafts	(6,171		)	2,176			(6,171		)	2,176
Decrease in overdrafts													(6,172		)	(25,083		)
Proceeds from issuance of non-controlling interests	2,926			18,288			2,926			18,288			2,926			18,288
Distributions to and purchases of non-controlling interests	(301,213		)	(7,745		)	(301,213		)	(7,745		)	(306,427		)	(16,032		)
Net cash provided by financing activities	397,501			43,423			397,501			43,423
Net cash provided by (used in) financing activities													303,429			(35,145		)
Net increase (decrease) in cash and cash equivalents	18,480			(51,142		)	18,480			(51,142		)	37,864			(39,215		)
Cash and cash equivalents at beginning of period	122,549			175,178			122,549			175,178			122,549			175,178
Cash and cash equivalents at end of period	$	141,029		$	124,036		$	141,029		$	124,036		$	160,413		$	135,963
Supplemental Information
Cash paid for interest	$	97,338		$	97,909		$	97,338		$	97,909		$	134,378		$	149,090
Cash paid for taxes	22,480			29,241			22,480			29,241			40,460			58,472
Non-cash equity exchange for acquisition of U.S. HealthWorks	238,000			—			238,000			—			238,000			—

The accompanying notes are an integral part of these condensed consolidated financial statements.

SELECT MEDICAL HOLDINGS ~~CORPORATION AND SELECT MEDICAL~~ CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.	Basis of Presentation

The unaudited condensed consolidated financial statements of Select Medical Holdings Corporation (“Holdings”) include the accounts of its wholly owned subsidiary, Select Medical Corporation (“Select”). Holdings conducts substantially all of its business through Select and its subsidiaries. Holdings and Select and its subsidiaries are collectively referred to as the “Company.” The unaudited condensed consolidated financial statements of the Company as of ~~June~~September 30, 2019, and for the three and ~~six~~nine month periods ended ~~June~~September 30, 2018 and 2019, have been prepared pursuant to the rules and regulations of the Securities Exchange Commission (the “SEC”) for interim reporting and accounting principles generally accepted in the United States of America (“GAAP”). Accordingly, certain information and disclosures required by GAAP, which are normally included in the notes to consolidated financial statements, have been condensed or omitted pursuant to those rules and regulations, although the Company believes the disclosure is adequate to make the information presented not misleading. In the opinion of management, such information contains all adjustments, which are normal and recurring in nature, necessary for a fair statement of the financial position, results of operations and cash flow for such periods. All significant intercompany transactions and balances have been eliminated.

The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2019, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2019. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 21, 2019.


2.	Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Credit Risk Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash balances and trade receivables. The Company’s excess cash is held with large financial institutions. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s facilities and are insured under third-party payor agreements. The Company’s general policy is to verify insurance coverage prior to the date of admission for patients admitted to the Company’s critical illness recovery hospitals and rehabilitation hospitals. Within the Company’s outpatient rehabilitation clinics, the Company verifies insurance coverage prior to the patient’s visit. Within the Company’s Concentra centers, the Company verifies insurance coverage or receives authorization from the patient’s employer prior to the patient’s visit.

Because of the geographic diversity of the Company’s facilities and non-governmental third-party payors, Medicare represents the Company’s only significant concentration of credit risk. Approximately 16% and 15% of the Company’s accounts receivable is from Medicare at ~~both~~ December 31, 2018, and ~~June~~September 30, ~~2019.~~2019, respectively.

Leases

The Company evaluates whether a contract is or contains a lease at the inception of the contract. Upon lease commencement, the date on which a lessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. Most of the Company’s facility and equipment leases are classified as operating leases.

Balance Sheet

For both operating and finance leases, the Company recognizes a right-of-use asset and lease liability at lease commencement. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term while the lease liability represents an obligation to make lease payments arising from a lease which are measured on a discounted basis. The Company elected the short-term lease exemption for its equipment leases; accordingly, equipment leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets.

Lease liabilities are measured at the present value of the remaining, fixed lease payments at lease commencement. The Company primarily uses its incremental borrowing rate, based on the information available at lease commencement, in determining the present value of its remaining lease payments. The Company’s leases may also specify extension or termination clauses. These options are factored into the measurement of the lease liability when it is reasonably certain that the Company will exercise the option. Right-of-use assets are measured at an amount equal to the initial lease liability, plus any prepaid lease payments (less any incentives received, such as reimbursement for leasehold improvements) and initial direct costs, at the lease commencement date.

The Company has elected to account for lease and non-lease components, such as common area maintenance, as a single lease component for its facility leases. As a result, the fixed payments that would otherwise be allocated to the non-lease components will be accounted for as lease payments and are included in the measurement of the Company’s right-of-use asset and lease liability.

Statement of Operations

For the Company’s operating leases, rent expense, a component of cost of services and general and administrative expenses on the consolidated statements of operations, is recognized on a straight-line basis over the lease term. The straight-line rent expense is reflective of the interest expense on the lease liability using the effective interest method and the amortization of the right-of-use asset. The Company may enter into arrangements to sublease portions of its facilities and the Company typically retains the obligation to the lessor under these arrangements. The Company’s subleases are classified as operating leases; accordingly, the Company continues to account for the original leases as it did prior to commencement of the ~~sublease.~~subleases. Sublease income, a component of cost of services on the consolidated statements of operations, is recognized on a straight-line basis, as a reduction to rent expense, over the term of the sublease.

For the Company’s finance leases, interest expense on the lease liability is recognized using the effective interest method. Amortization expense related to the right-of-use asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term.

The Company elected the short-term lease exemption for its equipment leases. For these leases, the Company recognizes lease payments on a straight-line basis over the lease term and variable lease payments are expensed as incurred. These expenses are included as components of cost of services on the consolidated statements of operations.

The Company makes payments related to changes in indexes or rates after the lease commencement date. Additionally, the Company makes payments, which are not fixed at lease commencement, for property taxes, insurance, and common area maintenance related to its facility leases. These variable lease payments, which are expensed as incurred, are included as a component of cost of services and general and administrative expenses on the consolidated statements of operations.

Recent Accounting Pronouncements

Financial Instruments

In June 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. The current standard delays the recognition of a credit loss on a financial asset until the loss is probable of occurring. The new standard removes the requirement that a credit loss be probable of occurring for it to be recognized and requires entities to use historical experience, current conditions, and reasonable and supportable forecasts to estimate their future expected credit losses. The financial instruments subject to ASU 2016-13 are the Company’s accounts receivable ~~derived from contracts with customers will be subject to ASU 2016-13.~~and notes receivable.

The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance must be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the earliest comparative period in the financial statements. Given the very high rate of collectability of the Company’s ~~accounts receivable derived from contracts with customers, the Company believes that~~financial instruments, the impact of ASU 2016-13 ~~is unlikely~~will not be material to ~~be material.~~the Company’s consolidated financial statements.

The Company’s implementation efforts are focused on finalizing the accounting processes ~~risk assessments,~~ and ~~control objectives~~related controls associated with accounting for its financial instruments under the new standard.

Recently Adopted Accounting Pronouncements

Leases

The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases using a modified retrospective approach as of January 1, 2019, for leases which existed on that date. Prior comparative periods were not adjusted and continue to be reported in accordance with ASC Topic 840, Leases.

The Company elected the package of practical expedients, which permitted the Company not to reassess under ASC Topic 842 the Company’s prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.

The adoption of the standard resulted in the recognition of operating lease right-of-use assets of $1,015.0 million and operating lease liabilities of $1,057.0 million at January 1, 2019. The difference between the operating lease right-of-use assets and operating lease liabilities resulted from the reclassification of prepaid rent, deferred rent, unamortized lease incentives, and acquired favorable and unfavorable leasehold interests upon adoption. The Company did not recognize a cumulative-effect adjustment to retained earnings upon adoption.


3.	Redeemable Non-Controlling Interests

The ownership interests held by outside parties in subsidiaries, limited liability companies, and limited partnerships controlled by the Company are classified as non-controlling interests. Some of the Company’s non-controlling ownership interests consist of outside parties that have certain redemption rights that, if exercised, require the Company to purchase the parties’ ownership interests. These interests are classified and reported as redeemable non-controlling interests and have been adjusted to their approximate redemption values.

The changes in redeemable non-controlling interests ~~which are the same for Holdings and Select,~~ are as follows (in thousands):


Balance as of December 31, 2017	$	640,818
				Nine Months Ended September 30,
				2018			2019
Balance as of January 1				$	640,818		$	780,488
Net income attributable to redeemable non-controlling interests	5,743			5,743			7,700
Issuance and exchange of redeemable non-controlling interests	163,659			163,659			—
Distributions to and purchases of redeemable non-controlling interests	(203,972		)	(203,972		)	(2,771		)
Redemption adjustment on redeemable non-controlling interests	1,051			1,051			47,470
Other	175			175			354
Balance as of March 31, 2018	$	607,474
Balance as of March 31				$	607,474		$	833,241
Net income attributable to redeemable non-controlling interests	10,909			10,909			11,507
Distributions to and purchases of redeemable non-controlling interests	(11,112		)	(11,112		)	(395		)
Redemption adjustment on redeemable non-controlling interests	8,500			8,500			(270		)
Other	461			461			339
Balance as of June 30, 2018	$	616,232
Balance as of June 30				$	616,232		$	844,422
Net income attributable to redeemable non-controlling interests				9,244			6,096
Distributions to and purchases of redeemable non-controlling interests				(763		)	(1,721		)
Redemption adjustment on redeemable non-controlling interests				154,514			104,553
Other				347			347
Balance as of September 30				$	779,574		$	953,697

Balance as of December 31, 2018 $ 780,488
Net income attributable to redeemable non-controlling interests 7,700
Distributions to and purchases of redeemable non-controlling interests (2,771 )
Redemption adjustment on redeemable non-controlling interests 47,470
Other 354
Balance as of March 31, 2019 $ 833,241
Net income attributable to redeemable non-controlling interests 11,507
Distributions to and purchases of redeemable non-controlling interests (395 )
Redemption adjustment on redeemable non-controlling interests (270 )
Other 339
Balance as of June 30, 2019 $ 844,422


4.	Acquisitions

U.S. HealthWorks Acquisition

On February 1, 2018, Concentra Inc. ~~(“Concentra”)~~ acquired all of the issued and outstanding shares of stock of U.S. HealthWorks, Inc. (“U.S. HealthWorks”), an occupational medicine and urgent care service provider, from Dignity Health Holding Corporation (“DHHC”).

~~Concentra acquired~~ U.S. HealthWorks was acquired for $753.6 million. DHHC, a subsidiary of Dignity Health, was issued a 20.0% equity interest in Concentra Group Holdings Parent, LLC (“Concentra Group Holdings Parent”) which was valued at $238.0 million. The remainder of the purchase price was paid in cash. Select retained a majority voting interest in Concentra Group Holdings Parent following the closing of the transaction.

For the U.S. HealthWorks acquisition, the Company allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values in accordance with the provisions of ASC Topic 805, Business Combinations. During the year ended December 31, 2018, the Company finalized the purchase accounting related to this acquisition.

The following table reconciles the fair values of identifiable net assets and goodwill to the consideration given for the acquired business (in thousands):



Accounts receivable	$	68,934
Other current assets	10,810
Property and equipment	69,712
Identifiable intangible assets	140,406
Other assets	25,435
Goodwill	540,067
Total assets	855,364
Accounts payable and other current liabilities	49,925
Deferred income taxes and other long-term liabilities	51,851
Total liabilities	101,776
Consideration given	$	753,588

For the three months ended ~~June~~September 30, 2018, U.S. HealthWorks contributed net operating revenues of ~~$139.4~~$133.3 million which is reflected in the Company’s consolidated statement of operations. For the period February 1, 2018 through ~~June~~September 30, 2018, U.S. HealthWorks contributed net operating revenues of ~~$229.4~~$362.7 million which is reflected in the Company’s consolidated statement of operations for the ~~six~~nine months ended ~~June~~September 30, 2018. Due to the integrated nature of the Company’s operations, the Company believes that it is not practicable to separately identify earnings of U.S. HealthWorks on a stand-alone basis.

Pro Forma Results

The following pro forma unaudited results of operations have been prepared assuming the acquisition of U.S. HealthWorks occurred on January 1, 2017. These results are not necessarily indicative of the results of future operations nor of the results that would have occurred had the acquisition been consummated on the aforementioned date. For the three and ~~six~~nine months ended ~~June~~September 30, 2019, the Company’s results of operations include U.S. HealthWorks for the entire period and no pro forma adjustments were made.


	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
	(in thousands)				(in thousands)
Net operating revenues	$	1,296,210	$	2,596,755	$	1,267,401	$	3,864,155
Net income attributable to the Company	48,563		82,365
Net income attributable to Select Medical Holdings Corporation					34,441		116,135

The Company’s pro forma results were adjusted to recognize U.S. HealthWorks acquisition costs as of January 1, 2017. Accordingly, for the ~~six~~nine months ended ~~June~~September 30, 2018, pro forma results were adjusted to exclude $2.9 million of U.S. HealthWorks acquisition costs.


5.	Sale of Businesses

During the ~~six~~nine months ended ~~June~~September 30, 2019, the Company recognized a ~~non-operating~~ gain of $6.5 million which resulted from the sale of 22 ~~wholly-owned~~wholly owned outpatient rehabilitation clinics to a non-consolidating subsidiary. During the ~~six~~nine months ended ~~June~~September 30, 2018, the Company recognized a ~~non-operating~~ gain of ~~$6.9~~$9.0 million. The ~~non-operating~~ gain resulted principally from the sale of ~~26 wholly-owned~~41 wholly owned outpatient rehabilitation clinics to a non-consolidating ~~subsidiary.~~subsidiaries.


6.	Variable Interest Entities

Concentra does not own many of its medical practices, as certain states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medicine through the direct employment of physicians or from exercising control over medical decisions by physicians. In these states, Concentra typically enters into long-term management agreements with professional corporations or associations that are owned by licensed physicians, which, in turn, employ or contract with physicians who provide professional medical services in its occupational health centers.

The management agreements have terms that provide for Concentra to conduct, supervise, and manage the day-to-day non-medical operations of the occupational health centers and provide all management and administrative services. Concentra receives a management fee for these services, which is based, in part, on the performance of the professional corporation or association. Additionally, the outstanding voting equity interests of the professional corporations or associations are typically owned by licensed physicians appointed at Concentra’s discretion. Concentra has the ability to direct the transfer of ownership of the professional corporation or association to a new licensed physician at any time.

The total assets of Concentra’s variable interest entities, which are comprised principally of accounts receivable, were $166.2 million and ~~$193.2~~$202.3 million at December 31, 2018, and ~~June~~September 30, 2019, respectively. The total liabilities of Concentra’s variable interest entities, which are comprised principally of accounts payable, accrued expenses, and obligations payable for services received under the aforementioned management agreements, were $164.4 million and ~~$191.6~~$200.9 million at December 31, 2018, and ~~June~~September 30, 2019, respectively.


7.	Leases

The Company has operating and finance leases for its facilities and certain equipment. The Company leases its corporate office space from related parties.

The Company’s critical illness recovery hospitals and rehabilitation hospitals generally have lease terms of 10 years with ~~two,~~2, five year renewal options. These renewal options vary for hospitals which operate as a hospital within a hospital, or “HIH.” The Company’s outpatient rehabilitation clinics generally have lease terms of five years with ~~two,~~2, three to five year renewal options. The Company’s Concentra centers generally have lease terms of 10 years with ~~two,~~2, five year renewal options.

For the three and ~~six~~nine months ended ~~June~~September 30, 2019, the Company’s total lease cost was as follows (in thousands):


	Three Months Ended June 30, 2019								Three Months Ended September 30, 2019
	Unrelated Parties			Related Parties		Total			Unrelated Parties			Related Parties		Total
Operating lease cost	$	67,718		$	1,342	$	69,060		$	68,046		$	1,342	$	69,388
Finance lease cost:
Amortization of right-of-use assets	90			—		90			73			—		73
Interest on lease liabilities	199			—		199			259			—		259
Short-term lease cost	592			—		592			592			—		592
Variable lease cost	8,755			85		8,840			11,789			156		11,945
Sublease income	(2,442		)	—		(2,442		)	(2,458		)	—		(2,458		)
Total lease cost	$	74,912		$	1,427	$	76,339		$	78,301		$	1,498	$	79,799


	Six Months Ended June 30, 2019								Nine Months Ended September 30, 2019
	Unrelated Parties			Related Parties		Total			Unrelated Parties			Related Parties		Total
Operating lease cost	$	134,554		$	2,684	$	137,238		$	202,600		$	4,026	$	206,626
Finance lease cost:
Amortization of right-of-use assets	126			—		126			199			—		199
Interest on lease liabilities	296			—		296			555			—		555
Short-term lease cost	1,184			—		1,184			1,776			—		1,776
Variable lease cost	20,591			241		20,832			32,380			397		32,777
Sublease income	(4,930		)	—		(4,930		)	(7,388		)	—		(7,388		)
Total lease cost	$	151,821		$	2,925	$	154,746		$	230,122		$	4,423	$	234,545

For the ~~six~~nine months ended ~~June~~September 30, 2019, supplemental cash flow information related to leases was as follows (in thousands):


Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	136,300	$	204,909
Operating cash flows for finance leases	274		526
Financing cash flows for finance leases	142		183
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾	$	1,123,793	$	1,202,165
Finance leases	9,102		9,102

_______________________________________________________________________________


(1)	Includes the right-of-use assets obtained in exchange for lease liabilities of $1,057.0 million which were recognized upon adoption of ASC Topic 842 at January 1, 2019.

As of ~~June~~September 30, 2019, supplemental balance sheet information related to leases was as follows (in thousands):


	Operating Leases						Operating Leases
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Operating lease right-of-use assets	$	951,993	$	19,392	$	971,385	$	968,181	$	18,338	$	986,519

Current operating lease liabilities	$	197,660	$	4,824	$	202,484	$	200,012	$	4,924	$	204,936
Non-current operating lease liabilities	796,240		17,663		813,903		819,808		16,397		836,205
Total operating lease liabilities	$	993,900	$	22,487	$	1,016,387	$	1,019,820	$	21,321	$	1,041,141


	Finance Leases						Finance Leases
	Unrelated Parties		Related Parties		Total		Unrelated Parties		Related Parties		Total
Property and equipment, net	$	5,099	$	—	$	5,099	$	5,027	$	—	$	5,027

Current portion of long-term debt and notes payable	$	204	$	—	$	204	$	210	$	—	$	210
Long-term debt, net of current portion	13,185		—		13,185		13,137		—		13,137
Total finance lease liabilities	$	13,389	$	—	$	13,389	$	13,347	$	—	$	13,347

As of ~~June~~September 30, 2019, the weighted average remaining lease terms and discount rates were as follows:



Weighted average remaining lease term (in years):
Operating leases	8.1
Finance leases	~~34.8~~34.9
Weighted average discount rate:
Operating leases	5.9	%
Finance leases	7.4	%

As of ~~June~~September 30, 2019, maturities of lease liabilities were approximately as follows (in thousands):


	Operating Leases		Finance Leases		Total		Operating Leases		Finance Leases		Total
2019 (remainder of year)	$	132,470	$	588	$	133,058	$	67,567	$	294	$	67,861
2020	238,479		1,182		239,661		250,778		1,182		251,960
2021	200,677		1,193		201,870		213,486		1,193		214,679
2022	159,238		1,203		160,441		173,399		1,203		174,602
2023	118,365		1,214		119,579		131,550		1,214		132,764
Thereafter	516,615		31,630		548,245		556,103		31,630		587,733
Total undiscounted cash flows	1,365,844		37,010		1,402,854		1,392,883		36,716		1,429,599
Less: Imputed interest	349,457		23,621		373,078		351,742		23,369		375,111
Total discounted lease liabilities	$	1,016,387	$	13,389	$	1,029,776	$	1,041,141	$	13,347	$	1,054,488

As disclosed in the Company’s 2018 Annual Report on Form 10-K, the Company’s undiscounted future minimum lease obligations on long-term, non-cancelable operating leases with related and unrelated parties were approximately as follows as of December 31, 2018 (in thousands):



	Total
2019	$	267,846
2020	231,711
2021	193,155
2022	150,155
2023	107,759
Thereafter	484,038
	$	1,434,664


8.	Intangible Assets

Goodwill

The following table shows changes in the carrying amounts of goodwill by reporting unit for the ~~six~~nine months ended ~~June~~September 30, 2019:


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation			Concentra		Total			Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation			Concentra			Total
	(in thousands)												(in thousands)
Balance as of December 31, 2018	$	1,045,220	$	416,646	$	642,422		$	1,216,438	$	3,320,726		$	1,045,220	$	416,646	$	642,422		$	1,216,438		$	3,320,726
Acquired	30,028		14,254		7,712			18,298		70,292			30,028		14,254		7,996			18,299			70,577
Sold	—		—		(5,624		)	—		(5,624		)	—		—		(5,629		)	—			(5,629		)
Balance as of June 30, 2019	$	1,075,248	$	430,900	$	644,510		$	1,234,736	$	3,385,394
Measurement period adjustment													421		—		—			(3,439		)	(3,018		)
Balance as of September 30, 2019													$	1,075,669	$	430,900	$	644,789		$	1,231,298		$	3,382,656

Identifiable Intangible Assets

The following table provides the gross carrying amounts, accumulated amortization, and net carrying amounts for the Company’s identifiable intangible assets:


	December 31, 2018							June 30, 2019							December 31, 2018							September 30, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(in thousands)														(in thousands)
Indefinite-lived intangible assets:
Trademarks	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698	$	166,698	$	—		$	166,698
Certificates of need	19,174		—			19,174		17,080		—			17,080		19,174		—			19,174		17,166		—			17,166
Accreditations	1,857		—			1,857		1,857		—			1,857		1,857		—			1,857		1,874		—			1,874
Finite-lived intangible assets:
Trademarks	5,000		(4,583		)	417		5,000		(5,000		)	—		5,000		(4,583		)	417		5,000		(5,000		)	—
Customer relationships	280,710		(61,900		)	218,810		284,440		(74,516		)	209,924		280,710		(61,900		)	218,810		287,880		(81,010		)	206,870
Favorable leasehold interests⁽¹⁾	13,553		(6,064		)	7,489		—		—			—		13,553		(6,064		)	7,489		—		—			—
Non-compete agreements	29,400		(6,152		)	23,248		31,197		(7,421		)	23,776		29,400		(6,152		)	23,248		31,255		(8,100		)	23,155
Total identifiable intangible assets	$	516,392	$	(78,699	)	$	437,693	$	506,272	$	(86,937	)	$	419,335	$	516,392	$	(78,699	)	$	437,693	$	509,873	$	(94,110	)	$	415,763

_______________________________________________________________________________


(1)	Favorable leasehold interests are a component of the operating lease right-of-use assets upon adoption of ASC Topic 842, Leases.

The Company’s accreditations and indefinite-lived trademarks have renewal terms and the costs to renew these intangible assets are expensed as incurred. At ~~June~~September 30, 2019, the accreditations and indefinite-lived trademarks have a weighted average time until next renewal of 1.5 years and ~~7.7~~7.4 years, respectively.

The Company’s finite-lived intangible assets amortize over their estimated useful lives. Amortization expense was ~~$7.8~~$7.9 million and ~~$8.9~~$6.9 million for the three months ended ~~June~~September 30, 2018 and 2019, respectively. Amortization expense was ~~$14.2~~$22.1 million and ~~$16.0~~$22.9 million for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2019, respectively.


9.	Long-Term Debt and Notes Payable

For purposes of this indebtedness footnote, references to Select exclude Concentra Inc. because the Concentra credit facilities are non-recourse to Holdings and Select.

As of ~~June~~September 30, 2019, the Company’s long-term debt and notes payable were as follows (in thousands):


	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value		Principal Outstanding		Unamortized Discount			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	436		$	(3,689	)	$	706,747	$	710,852
6.250% senior notes													$	550,000	$	—		$	(10,582	)	$	539,418	$	576,125
Credit facilities:
Revolving facility	195,000		—			—			195,000		179,400
Term loan	1,031,068		(8,879		)	(8,458		)	1,013,731		1,027,201		1,531,068		(10,915		)	(11,302		)	1,508,851		1,532,982
Other debt, including finance leases	74,864		—			(444		)	74,420		74,420		70,816		—			(420		)	70,396		70,396
Total Select debt	2,010,932		(8,443		)	(12,591		)	1,989,898		1,991,873		2,151,884		(10,915		)	(22,304		)	2,118,665		2,179,503
Concentra:
Concentra Inc.:
Credit facilities:
Term loans	1,380,297		(2,354		)	(15,648		)	1,362,295		1,380,158
Term loan													1,240,298		(2,643		)	(10,008		)	1,227,647		1,246,499
Other debt, including finance leases	6,521		—			—			6,521		6,521		5,850		—			—			5,850		5,850
Total Concentra debt	1,386,818		(2,354		)	(15,648		)	1,368,816		1,386,679
Total Concentra Inc. debt													1,246,148		(2,643		)	(10,008		)	1,233,497		1,252,349
Total debt	$	3,397,750	$	(10,797	)	$	(28,239	)	$	3,358,714	$	3,378,552	$	3,398,032	$	(13,558	)	$	(32,312	)	$	3,352,162	$	3,431,852

Principal maturities of the Company’s long-term debt and notes payable were approximately as follows (in thousands):


	2019		2020		2021		2022		2023		Thereafter		Total		2019		2020		2021		2022		2023		Thereafter		Total
Select:
6.375% senior notes	$	—	$	—	$	710,000	$	—	$	—	$	—	$	710,000
6.250% senior notes															$	—	$	—	$	—	$	—	$	—	$	550,000	$	550,000
Credit facilities:
Revolving facility	—		—		—		195,000		—		—		195,000
Term loan	—		—		—		—		—		1,031,068		1,031,068		1,250		5,000		5,000		5,000		5,000		1,509,818		1,531,068
Other debt, including finance leases	5,595		3,003		1,814		23,036		38		41,378		74,864		3,541		5,502		1,814		18,036		38		41,885		70,816
Total Select debt	5,595		3,003		711,814		218,036		38		1,072,446		2,010,932		4,791		10,502		6,814		23,036		5,038		2,101,703		2,151,884
Concentra:
Concentra Inc.:
Credit facilities:
Term loans	—		—		—		1,140,298		239,999		—		1,380,297
Term loan															250		1,000		1,000		1,238,048		—		—		1,240,298
Other debt, including finance leases	807		1,194		330		358		363		3,469		6,521		136		1,194		330		358		363		3,469		5,850
Total Concentra debt	807		1,194		330		1,140,656		240,362		3,469		1,386,818
Total Concentra Inc. debt															386		2,194		1,330		1,238,406		363		3,469		1,246,148
Total debt	$	6,402	$	4,197	$	712,144	$	1,358,692	$	240,400	$	1,075,915	$	3,397,750	$	5,177	$	12,696	$	8,144	$	1,261,442	$	5,401	$	2,105,172	$	3,398,032

As of December 31, 2018, the Company’s long-term debt and notes payable were as follows (in thousands):


	Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value		Principal Outstanding		Unamortized Premium (Discount)			Unamortized Issuance Costs			Carrying Value		Fair Value
Select:
6.375% senior notes	$	710,000	$	550		$	(4,642	)	$	705,908	$	706,450	$	710,000	$	550		$	(4,642	)	$	705,908	$	706,450
Credit facilities:
Revolving facility	20,000		—			—			20,000		18,400		20,000		—			—			20,000		18,400
Term loan	1,129,875		(9,690		)	(9,321		)	1,110,864		1,076,206		1,129,875		(9,690		)	(9,321		)	1,110,864		1,076,206
Other	56,415		—			(484		)	55,931		55,931		56,415		—			(484		)	55,931		55,931
Total Select debt	1,916,290		(9,140		)	(14,447		)	1,892,703		1,856,987		1,916,290		(9,140		)	(14,447		)	1,892,703		1,856,987
Concentra:
Concentra Inc.:
Credit facilities:
Term loans	1,414,175		(2,765		)	(18,648		)	1,392,762		1,357,802		1,414,175		(2,765		)	(18,648		)	1,392,762		1,357,802
Other debt, including finance leases	7,916		—			—			7,916		7,916		7,916		—			—			7,916		7,916
Total Concentra debt	1,422,091		(2,765		)	(18,648		)	1,400,678		1,365,718
Total Concentra Inc. debt													1,422,091		(2,765		)	(18,648		)	1,400,678		1,365,718
Total debt	$	3,338,381	$	(11,905	)	$	(33,095	)	$	3,293,381	$	3,222,705	$	3,338,381	$	(11,905	)	$	(33,095	)	$	3,293,381	$	3,222,705

~~Amendment to~~ Concentra ~~First Lien~~ Credit ~~Agreement~~Facilities

On April 8, 2019, Concentra Inc. entered into Amendment No. 5 to the Concentra first lien credit agreement. Amendment No. 5, among other things, (i) extended the maturity date of the Concentra revolving ~~credit~~ facility from June 1, 2020 to June 1, 2021 and (ii) increased the aggregate commitments available under the Concentra revolving ~~credit~~ facility from $75.0 million to $100.0 million.

On September 20, 2019, Concentra Inc. entered into Amendment No. 6 to the Concentra first lien credit agreement. Amendment No. 6, among other things, (i) provided for an additional $100.0 million in term loans that, along with the existing Concentra first lien term loans, have a maturity date of June 1, 2022 and (ii) extended the maturity date of the revolving facility from June 1, 2021 to March 1, 2022. Concentra Inc. used the incremental borrowings under the Concentra first lien credit agreement to prepay in full all of its term loans outstanding under the Concentra second lien credit agreement on September 20, 2019.

Select Credit Facilities

On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement dated March 6, 2017. Amendment No. 3, among other things, (i) provided for an additional $500.0 million in term loans that, along with the existing term loans, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.

Select 6.250% Senior Notes

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior notes due August 15, 2026. Select used a portion of the net proceeds of the 6.250% senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described above), in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the outstanding borrowings under Select’s revolving facility, and (iii) pay related fees and expenses associated with the financing.

Interest on the senior notes accrues at the rate of 6.250% per annum and is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The senior notes are Select’s senior unsecured obligations which are subordinated to all of Select’s existing and future secured indebtedness, including the Select credit facilities. The senior notes rank equally in right of payment with all of Select’s other existing and future senior unsecured indebtedness and senior in right of payment to all of Select’s existing and future subordinated indebtedness. The senior notes are unconditionally guaranteed on a joint and several basis by each of Select’s direct or indirect existing and future domestic restricted subsidiaries, other than certain non-guarantor subsidiaries.

Select may redeem some or all of the senior notes prior to August 15, 2022 by paying a “make-whole” premium. Select may redeem some or all of the senior notes on or after August 15, 2022 at specified redemption prices. In addition, prior to August 15, 2022, Select may redeem up to 40% of the principal amount of the senior notes with the net proceeds of certain equity offerings at a price of 106.250% plus accrued and unpaid interest, if any. Select is obligated to offer to repurchase the senior notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.

The terms of the senior notes contains covenants that, among other things, limit Select’s ability and the ability of certain of Select’s subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of Select’s restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. These covenants are subject to a number of exceptions, limitations and qualifications.

Loss on Early Retirement of Debt

The Company incurred losses on early retirement of debt totaling $18.6 million for the nine months ended September 30, 2019.

Excess Cash Flow Payment

In February 2019, Select made a principal prepayment of approximately $98.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities. ~~The principal prepayment was applied against future payments sequentially; as a result, no further loan amortization payments will be required on the Select term loan until maturity on March 6, 2025.~~

In February 2019, Concentra Inc. made a principal prepayment of approximately $33.9 million associated with its term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities. The principal prepayment was applied against future payments sequentially; as a result, no further loan amortization payments will be required on the terms loans outstanding under the Concentra first lien credit agreement until maturity on June 1, 2022.

Fair Value

The Company considers the inputs in the valuation process to be Level 2 in the fair value hierarchy for Select’s ~~6.375%~~6.250% senior notes and for ~~its~~the Select and Concentra credit facilities. Level 2 in the fair value hierarchy is defined as inputs that are observable for the asset or liability, either directly or indirectly, which includes quoted prices for identical assets or liabilities in markets that are not active.

The fair values of the Select credit facilities and the Concentra credit facilities were based on quoted market prices for this debt in the syndicated loan market. The fair value of Select’s ~~6.375%~~6.250% senior notes was based on quoted market prices. The carrying amount of other debt, principally short-term notes payable, approximates fair value.


10.	Segment Information

The Company’s reportable segments include the critical illness recovery hospital segment, rehabilitation hospital segment, outpatient rehabilitation segment, and Concentra segment. Other activities include the Company’s corporate shared services, certain investments, and employee leasing services with non-consolidating subsidiaries. ~~During the three months ended June 30,~~Prior to 2019, ~~the Company began reporting the net operating revenues and expenses associated with~~these employee leasing ~~services provided to its non-consolidating subsidiaries as part of the Company’s other activities. Previously, these~~ services were reflected in the financial results of the Company’s reportable segments. ~~Under these employee leasing arrangements, actual labor costs are passed through~~Net operating revenues have been conformed to the ~~Company’s non-consolidating subsidiaries, resulting in~~current presentation for the ~~Company’s recognition of net operating revenues equal to the actual labor costs incurred.~~three and nine months ended September 30, 2018.

The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, ~~non-operating~~ gain (loss), on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. The Company has provided additional information regarding its reportable segments, such as total assets, which contributes to the understanding of the Company and provides useful information to the users of the consolidated financial statements.

The following tables summarize selected financial data for the Company’s reportable segments. Prior year results presented herein have been changed to conform to the current presentation. ~~The segment results of Holdings are identical to those of Select.~~


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2019			2018			2019			2018			2019			2018			2019
	(in thousands)												(in thousands)
Net operating revenues:
Critical illness recovery hospital	$	442,452		$	461,143		$	907,128		$	918,677		$	420,108		$	462,892		$	1,327,236		$	1,381,569
Rehabilitation hospital	144,779			160,374			288,087			314,932			144,588			173,369			432,675			488,301
Outpatient rehabilitation	253,914			261,891			498,145			508,796			245,234			265,330			743,379			774,126
Concentra	412,823			413,451			768,939			809,772			404,481			421,900			1,173,420			1,231,672
Other	42,242			64,505			86,875			133,818			52,990			69,852			139,865			203,670
Total Company	$	1,296,210		$	1,361,364		$	2,549,174		$	2,685,995		$	1,267,401		$	1,393,343		$	3,816,575		$	4,079,338
Adjusted EBITDA:
Critical illness recovery hospital	$	60,725		$	64,138		$	133,697		$	137,136		$	53,292		$	57,247		$	186,989		$	194,383
Rehabilitation hospital	28,195			29,968			54,971			55,765			25,343			36,780			80,314			92,545
Outpatient rehabilitation	41,947			42,584			72,472			71,575			34,531			40,040			107,003			111,615
Concentra	72,568			76,087			130,365			142,345			68,754			77,679			199,119			220,024
Other	(25,207		)	(26,544		)	(50,045		)	(50,471		)	(25,292		)	(29,081		)	(75,337		)	(79,552		)
Total Company	$	178,228		$	186,233		$	341,460		$	356,350		$	156,628		$	182,665		$	498,088		$	539,015
Total assets:
Critical illness recovery hospital	$	1,828,038		$	2,119,574		$	1,828,038		$	2,119,574		$	1,785,336		$	2,116,512		$	1,785,336		$	2,116,512
Rehabilitation hospital	867,175			1,107,852			867,175			1,107,852			888,342			1,121,260			888,342			1,121,260
Outpatient rehabilitation	979,678			1,265,487			979,678			1,265,487			991,105			1,280,712			991,105			1,280,712
Concentra	2,174,931			2,447,387			2,174,931			2,447,387			2,201,869			2,366,227			2,201,869			2,366,227
Other	114,978			166,640			114,978			166,640			113,529			270,045			113,529			270,045
Total Company	$	5,964,800		$	7,106,940		$	5,964,800		$	7,106,940		$	5,980,181		$	7,154,756		$	5,980,181		$	7,154,756
Purchases of property and equipment:
Critical illness recovery hospital	$	12,849		$	14,488		$	23,321		$	24,648		$	8,134		$	12,254		$	31,455		$	36,902
Rehabilitation hospital	8,080			5,356			20,997			18,539			8,769			5,293			29,766			23,832
Outpatient rehabilitation	8,018			6,705			15,356			15,745			7,209			7,476			22,565			23,221
Concentra	10,121			12,240			16,742			27,938			12,539			8,240			29,281			36,178
Other	2,963			1,423			5,232			2,415			2,740			1,408			7,972			3,823
Total Company	$	42,031		$	40,212		$	81,648		$	89,285		$	39,391		$	34,671		$	121,039		$	123,956

A reconciliation of Adjusted EBITDA to income before income taxes is as follows:


	Three Months Ended June 30, 2018																		Three Months Ended September 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Adjusted EBITDA	$	60,725		$	28,195		$	41,947		$	72,568		$	(25,207	)				$	53,292		$	25,343		$	34,531		$	68,754		$	(25,292	)
Depreciation and amortization	(11,952		)	(6,015		)	(6,704		)	(24,697		)	(2,356		)				(11,136		)	(6,079		)	(6,597		)	(24,488		)	(2,227		)
Stock compensation expense	—			—			—			(1,138		)	(4,846		)				—			—			—			(767		)	(5,497		)
U.S. HealthWorks acquisition costs	—			—			—			41			—
Income (loss) from operations	$	48,773		$	22,180		$	35,243		$	46,774		$	(32,409	)	$	120,561		$	42,156		$	19,264		$	27,934		$	43,499		$	(33,016	)	$	99,837
Equity in earnings of unconsolidated subsidiaries																4,785																		5,432
Non-operating gain																6,478
Gain on sale of businesses																																		2,139
Interest expense																(50,159		)																(50,669		)
Income before income taxes																$	81,665																	$	56,739


	Three Months Ended June 30, 2019																		Three Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Adjusted EBITDA	$	64,138		$	29,968		$	42,584		$	76,087		$	(26,544	)				$	57,247		$	36,780		$	40,040		$	77,679		$	(29,081	)
Depreciation and amortization	(14,495		)	(6,696		)	(6,991		)	(24,479		)	(2,332		)				(12,484		)	(7,234		)	(6,887		)	(23,989		)	(2,347		)
Stock compensation expense	—			—			—			(767		)	(5,591		)				—			—			—			(768		)	(6,050		)
Income (loss) from operations	$	49,643		$	23,272		$	35,593		$	50,841		$	(34,467	)	$	124,882		$	44,763		$	29,546		$	33,153		$	52,922		$	(37,478	)	$	122,906
Loss on early retirement of debt																																		(18,643		)
Equity in earnings of unconsolidated subsidiaries																7,394																		6,950
Interest expense																(51,464		)																(54,336		)
Income before income taxes																$	80,812																	$	56,877



	Nine Months Ended September 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)
Adjusted EBITDA	$	186,989		$	80,314		$	107,003		$	199,119		$	(75,337	)
Depreciation and amortization	(34,146		)	(17,816		)	(19,938		)	(70,332		)	(6,790		)
Stock compensation expense	—			—			—			(2,116		)	(15,059		)
U.S. HealthWorks acquisition costs	—			—			—			(2,895		)	—
Income (loss) from operations	$	152,843		$	62,498		$	87,065		$	123,776		$	(97,186	)	$	328,996
Loss on early retirement of debt																(10,255		)
Equity in earnings of unconsolidated subsidiaries																14,914
Gain on sale of businesses																9,016
Interest expense																(147,991		)
Income before income taxes																$	194,680

Six Months Ended June 30, 2018
Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Other Total
(in thousands)
Adjusted EBITDA $ 133,697
$ 54,971
$ 72,472
$ 130,365
$ (50,045 )
Depreciation and amortization (23,010 ) (11,737 ) (13,341 ) (45,844 ) (4,563 )
Stock compensation expense —
—
—
(1,349 ) (9,562 )
U.S. HealthWorks acquisition costs —
—
—
(2,895 ) —

Income (loss) from operations $ 110,687
$ 43,234
$ 59,131
$ 80,277
$ (64,170 ) $ 229,159
Loss on early retirement of debt

(10,255 )
Equity in earnings of unconsolidated subsidiaries

9,482
Non-operating gain

6,877
Interest expense

(97,322 )
Income before income taxes

$ 137,941


	Six Months Ended June 30, 2019																		Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Adjusted EBITDA	$	137,136		$	55,765		$	71,575		$	142,345		$	(50,471	)				$	194,383		$	92,545		$	111,615		$	220,024		$	(79,552	)
Depreciation and amortization	(25,946		)	(13,098		)	(14,023		)	(49,383		)	(4,681		)				(38,430		)	(20,332		)	(20,910		)	(73,372		)	(7,028		)
Stock compensation expense	—			—			—			(1,534		)	(11,079		)				—			—			—			(2,302		)	(17,129		)
Income (loss) from operations	$	111,190		$	42,667		$	57,552		$	91,428		$	(66,231	)	$	236,606		$	155,953		$	72,213		$	90,705		$	144,350		$	(103,709	)	$	359,512
Loss on early retirement of debt																																		(18,643		)
Equity in earnings of unconsolidated subsidiaries																11,760																		18,710
Non-operating gain																6,532
Gain on sale of businesses																																		6,532
Interest expense																(102,275		)																(156,611		)
Income before income taxes																$	152,623																	$	209,500


11.	Revenue from Contracts with Customers

Net operating revenues consist primarily of ~~patient service~~ revenues generated from services provided to patients and other revenues for services provided to healthcare institutions under contractual arrangements. The following tables disaggregate the Company’s net operating revenues for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2019:


	Three Months Ended June 30, 2018												Three Months Ended September 30, 2018
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)												(in thousands)
Patient service revenues:
Medicare	$	225,857	$	73,054	$	41,475	$	517	$	—	$	340,903	$	210,101	$	71,564	$	40,563	$	455	$	—	$	322,683
Non-Medicare	213,083		62,387		194,611		409,922		—		880,003		206,629		64,322		185,787		401,537		—		858,275
Total patient services revenues	438,940		135,441		236,086		410,439		—		1,220,906		416,730		135,886		226,350		401,992		—		1,180,958
Other revenues⁽¹⁾	3,512		9,338		17,828		2,384		42,242		75,304		3,378		8,702		18,884		2,489		52,990		86,443
Total net operating revenues	$	442,452	$	144,779	$	253,914	$	412,823	$	42,242	$	1,296,210	$	420,108	$	144,588	$	245,234	$	404,481	$	52,990	$	1,267,401


	Three Months Ended June 30, 2019												Three Months Ended September 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)												(in thousands)
Patient service revenues:
Medicare	$	223,688	$	77,260	$	43,869	$	474	$	—	$	345,291	$	218,096	$	86,495	$	44,230	$	451	$	—	$	349,272
Non-Medicare	234,616		73,972		198,241		410,277		—		917,106		240,603		76,957		200,093		418,380		—		936,033
Total patient services revenues	458,304		151,232		242,110		410,751		—		1,262,397		458,699		163,452		244,323		418,831		—		1,285,305
Other revenues	2,839		9,142		19,781		2,700		64,505		98,967		4,193		9,917		21,007		3,069		69,852		108,038
Total net operating revenues	$	461,143	$	160,374	$	261,891	$	413,451	$	64,505	$	1,361,364	$	462,892	$	173,369	$	265,330	$	421,900	$	69,852	$	1,393,343

Six Months Ended June 30, 2018
Critical Illness Recovery Hospital Rehabilitation Hospital
Outpatient
Rehabilitation
Concentra Other Total
(in thousands)
Patient service revenues:
Medicare $ 466,849
$ 145,895
$ 79,665
$ 1,145
$ —
$ 693,554
Non-Medicare 433,089
124,289
383,511
763,174
—
1,704,063
Total patient services revenues 899,938
270,184
463,176
764,319
—
2,397,617
Other revenues⁽¹⁾
7,190
17,903
34,969
4,620
86,875
151,557
Total net operating revenues $ 907,128
$ 288,087
$ 498,145
$ 768,939
$ 86,875
$ 2,549,174



	Nine Months Ended September 30, 2018
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)
Patient service revenues:
Medicare	$	676,950	$	217,459	$	120,228	$	1,600	$	—	$	1,016,237
Non-Medicare	639,718		188,611		569,298		1,164,711		—		2,562,338
Total patient services revenues	1,316,668		406,070		689,526		1,166,311		—		3,578,575
Other revenues⁽¹⁾	10,568		26,605		53,853		7,109		139,865		238,000
Total net operating revenues	$	1,327,236	$	432,675	$	743,379	$	1,173,420	$	139,865	$	3,816,575


	Six Months Ended June 30, 2019												Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
	(in thousands)												(in thousands)
Patient service revenues:
Medicare	$	461,857	$	151,839	$	84,147	$	1,029	$	—	$	698,872	$	679,953	$	238,334	$	128,377	$	1,480	$	—	$	1,048,144
Non-Medicare	451,575		144,614		386,155		803,513		—		1,785,857		692,178		221,571		586,248		1,221,893		—		2,721,890
Total patient services revenues	913,432		296,453		470,302		804,542		—		2,484,729		1,372,131		459,905		714,625		1,223,373		—		3,770,034
Other revenues	5,245		18,479		38,494		5,230		133,818		201,266		9,438		28,396		59,501		8,299		203,670		309,304
Total net operating revenues	$	918,677	$	314,932	$	508,796	$	809,772	$	133,818	$	2,685,995	$	1,381,569	$	488,301	$	774,126	$	1,231,672	$	203,670	$	4,079,338


(1)	For the three and ~~six~~nine months ended ~~June~~September 30, 2018, the financial results of the Company’s reportable segments have been changed to remove the net operating revenues associated with employee leasing services provided to the Company’s non-consolidating subsidiaries. These results are now reported as part of the Company’s other activities.


12.	Earnings per Share

The Company’s capital structure includes common stock and unvested restricted stock awards. To compute earnings per share (“EPS”), the Company applies the two-class method because the Company’s unvested restricted stock awards are participating securities which are entitled to participate equally with the Company’s common stock in undistributed earnings. Application of the Company’s two-class method is as follows:


(i)	Net income attributable to the Company is reduced by the amount of dividends declared and by the contractual amount of dividends that must be paid for the current period for each class of stock. There were no0 dividends declared or contractual dividends paid for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2019.


(ii)	The remaining undistributed net income of the Company is then equally allocated to its common stock and unvested restricted stock awards, as if all of the earnings for the period had been distributed. The total net income allocated to each security is determined by adding both distributed and undistributed net income for the period.


(i)	The net income allocated to each security is then divided by the weighted average number of outstanding shares for the period to determine the EPS for each security considered in the two-class method.

The following table sets forth the net income attributable to the Company, its common shares outstanding, and its participating securities outstanding.


	Basic EPS				Diluted EPS				Basic EPS				Diluted EPS
	Three Months Ended June 30,				Three Months Ended June 30,				Three Months Ended September 30,				Three Months Ended September 30,
	2018		2019		2018		2019		2018		2019		2018		2019
	(in thousands)								(in thousands)
Net income	$	60,559	$	59,986	$	60,559	$	59,986	$	42,679	$	44,030	$	42,679	$	44,030
Less: net income attributable to non-controlling interests	14,048		15,170		14,048		15,170		9,762		13,298		9,762		13,298
Net income attributable to the Company	46,511		44,816		46,511		44,816		32,917		30,732		32,917		30,732
Less: net income attributable to participating securities	1,517		1,484		1,517		1,484		1,098		1,052		1,098		1,052
Net income attributable to common shares	$	44,994	$	43,332	$	44,994	$	43,332	$	31,819	$	29,680	$	31,819	$	29,680


	Basic EPS				Diluted EPS				Basic EPS				Diluted EPS
	Six Months Ended June 30,				Six Months Ended June 30,				Nine Months Ended September 30,				Nine Months Ended September 30,
	2018		2019		2018		2019		2018		2019		2018		2019
	(in thousands)								(in thousands)
Net income	$	104,541	$	113,330	$	104,541	$	113,330	$	147,220	$	157,360	$	147,220	$	157,360
Less: net income attributable to non-controlling interests	24,291		27,680		24,291		27,680		34,053		40,978		34,053		40,978
Net income attributable to the Company	80,250		85,650		80,250		85,650		113,167		116,382		113,167		116,382
Less: net income attributable to participating securities	2,630		2,827		2,628		2,826		3,732		3,889		3,729		3,888
Net income attributable to common shares	$	77,620	$	82,823	$	77,622	$	82,824	$	109,435	$	112,493	$	109,438	$	112,494

The following tables set forth the computation of EPS under the two-class method:


	Three Months Ended June 30, 2018										Three Months Ended September 30, 2018
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS		Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)										(in thousands, except for per share amounts)
Common shares	$	44,994	129,830	$	0.35	$	44,994	129,924	$	0.35	$	31,819	130,387	$	0.24	$	31,819	130,447	$	0.24
Participating securities	1,517		4,379	$	0.35	1,517		4,379	$	0.35	1,098		4,501	$	0.24	1,098		4,501	$	0.24
Total Company	$	46,511				$	46,511				$	32,917				$	32,917


	Three Months Ended June 30, 2019										Three Months Ended September 30, 2019
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS		Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)										(in thousands, except for per share amounts)
Common shares	$	43,332	130,525	$	0.33	$	43,332	130,562	$	0.33	$	29,680	129,988	$	0.23	$	29,680	130,007	$	0.23
Participating securities	1,484		4,471	$	0.33	1,484		4,471	$	0.33	1,052		4,607	$	0.23	1,052		4,607	$	0.23
Total Company	$	44,816				$	44,816				$	30,732				$	30,732


	Six Months Ended June 30, 2018										Nine Months Ended September 30, 2018
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS		Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)										(in thousands, except for per share amounts)
Common shares	$	77,620	129,761	$	0.60	$	77,622	129,871	$	0.60	$	109,435	129,972	$	0.84	$	109,438	130,066	$	0.84
Participating securities	2,630		4,397	$	0.60	2,628		4,397	$	0.60	3,732		4,432	$	0.84	3,729		4,432	$	0.84
Total Company	$	80,250				$	80,250				$	113,167				$	113,167


	Six Months Ended June 30, 2019										Nine Months Ended September 30, 2019
	Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS		Net Income Allocation		Shares⁽¹⁾	Basic EPS		Net Income Allocation		Shares⁽¹⁾	Diluted EPS
	(in thousands, except for per share amounts)										(in thousands, except for per share amounts)
Common shares	$	82,823	130,672	$	0.63	$	82,824	130,711	$	0.63	$	112,493	130,442	$	0.86	$	112,494	130,474	$	0.86
Participating securities	2,827		4,460	$	0.63	2,826		4,460	$	0.63	3,889		4,509	$	0.86	3,888		4,509	$	0.86
Total Company	$	85,650				$	85,650				$	116,382				$	116,382

(1) Represents the weighted average share count outstanding during the period.


13.	Commitments and Contingencies

Litigation

The Company is a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of its business. The Company cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject the Company to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, Centers for Medicare & Medicaid Services (“CMS”), or other federal and state enforcement and regulatory agencies may conduct additional investigations related to the Company’s businesses in the future that may, either individually or in the aggregate, have a material adverse effect on the Company’s business, financial position, results of operations, and liquidity.

To address claims arising out of the Company’s operations, the Company maintains professional malpractice liability insurance and general liability insurance coverages through a number of different programs that are dependent upon such factors as the state where the Company is operating and whether the operations are wholly owned or are operated through a joint venture. For the Company’s wholly owned operations, the Company currently maintains insurance coverages under a combination of policies with a total annual aggregate limit of up to $40.0 million. The Company’s insurance for the professional liability coverage is written on a “claims-made” basis, and its commercial general liability coverage is maintained on an “occurrence” basis. These coverages apply after a self-insured retention limit is exceeded. For the Company’s joint venture operations, the Company has numerous programs that are designed to respond to the risks of the specific joint venture. The annual aggregate limit under these programs ranges from $5.0 million to $20.0 million. The policies are generally written on a “claims-made” basis. Each of these programs has either a deductible or self-insured retention limit. The Company reviews its insurance program annually and may make adjustments to the amount of insurance coverage and self-insured retentions in future years. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions, as well as the cost and possible lack of available insurance, could subject the Company to substantial uninsured liabilities. In the Company’s opinion, the outcome of these actions, individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations, or cash flows.

Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. The Company is and has been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.

Evansville Litigation. On October 19, 2015, the plaintiff‑relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital-Evansville, LLC (“SSH‑Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff‑relators on behalf of the United States under the federal False Claims Act. The plaintiff‑relators are the former CEO and ~~two~~2 former case managers at SSH‑Evansville, and the defendants currently include the Company, SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH‑Evansville. The plaintiff‑relators allege that SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up‑coded diagnoses at admission, and admitted patients for whom long‑term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.

In December 2015, the defendants filed a Motion to Dismiss the Second Amended Complaint on multiple grounds, including that the action is disallowed by the False Claims Act’s public disclosure bar, which disqualifies qui tam actions that are based on fraud already publicly disclosed through enumerated sources, unless the relator is an original source, and that the plaintiff‑relators did not plead their claims with sufficient particularity, as required by the Federal Rules of Civil Procedure.

Thereafter, the United States filed a notice asserting a veto of the defendants’ use of the public disclosure bar for claims arising from conduct from and after March 23, 2010, which was based on certain statutory changes to the public disclosure bar language included in the Affordable Care Act. On September 30, 2016, the District Court partially granted and partially denied the defendants’ Motion to Dismiss. It ruled that the plaintiff‑relators alleged substantially the same conduct as had been publicly disclosed and that the ~~plaintiff relators~~plaintiff-relators are not original sources, so that the public disclosure bar requires dismissal of all non‑retaliation claims arising from conduct before March 23, 2010. The District Court also ruled that the statutory changes to the public disclosure bar gave the United States the power to veto its applicability to claims arising from conduct on and after March 23, 2010, and therefore did not dismiss those claims based on the public disclosure bar. However, the District Court ruled that the plaintiff‑relators did not plead certain of their claims relating to interrupted stay manipulation and premature discharging of patients with the requisite particularity, and dismissed those claims. The District Court declined to dismiss the ~~plaintiff relators’~~plaintiff-relators’ claims arising from conduct from and after March 23, 2010 relating to delayed discharging of patients and up-coding and the ~~plaintiff relators’~~plaintiff-relators’ retaliation claims. The plaintiff-relators then proposed a case management plan seeking nationwide discovery involving all of the Company’s LTCHs for the period from March 23, 2010 through the present and allowing discovery that would facilitate the use of statistical sampling to prove liability, which the defendants opposed. In April 2018, a U.S. magistrate judge ruled that plaintiff‑relators’ discovery will be limited to only SSH-Evansville for the period from March 23, 2010 through September 30, 2016, and that the plaintiff‑relators will be required to prove the fraud that they allege on a claim-by-claim basis, rather than using statistical sampling. The plaintiff-relators appealed this decision to the district judge who, in March 2019, affirmed the decision of the magistrate judge regarding the geographic and temporal scope of the case, but ruled that the question of statistical sampling is not ripe for review.

~~The Company intends to vigorously defend this action, but at this time~~In October 2019, the Company ~~is unable~~entered into a settlement agreement with the United States government and the plaintiff-relators. Under the terms of the settlement, the Company agreed to ~~predict~~make payments to the ~~timing~~government, the plaintiff-relators and ~~outcome of this matter.~~their counsel. Such payments, in the aggregate, are immaterial to the Company’s financial statements. In the settlement agreement, the government and the plaintiff-relators released all defendants from liability for all conduct alleged in the complaint, and the Company admitted no liability or wrongdoing.

Wilmington Litigation. On January 19, 2017, the United States District Court for the District of Delaware unsealed a qui tam Complaint in United States of America and State of Delaware ex rel. Theresa Kelly v. Select Specialty Hospital-Wilmington, Inc. (“SSH‑Wilmington”), Select Specialty Hospitals, Inc., Select Employment Services, Inc., Select Medical Corporation, and Crystal Cheek, No. 16‑347‑LPS. The Complaint was initially filed under seal in May 2016 by a former chief nursing officer at SSH‑Wilmington and was unsealed after the United States filed a Notice of Election to Decline Intervention in January 2017. The corporate defendants were served in March 2017. In the complaint, the plaintiff‑relator alleges that the Select defendants and an individual defendant, who is a former health information manager at SSH‑Wilmington, violated the False Claims Act and the Delaware False Claims and Reporting Act based on allegedly falsifying medical practitioner signatures on medical records and failing to properly examine the credentials of medical practitioners at SSH‑Wilmington. In response to the Select defendants’ motion to dismiss the Complaint, in May 2017 the plaintiff-relator filed an Amended Complaint asserting the same causes of action. The Select defendants filed a Motion to Dismiss the Amended Complaint based on numerous grounds, including that the Amended Complaint did not plead any alleged fraud with sufficient particularity, failed to plead that the alleged fraud was material to the government’s payment decision, failed to plead sufficient facts to establish that the Select defendants knowingly submitted false claims or records, and failed to allege any reverse false claim. In March 2018, the District Court dismissed the plaintiff‑relator’s claims related to the alleged failure to properly examine medical practitioners’ credentials, her reverse false claims allegations, and her claim that defendants violated the Delaware False Claims and Reporting Act. It denied the defendants’ motion to dismiss claims that the allegedly falsified medical practitioner signatures violated the False Claims Act. Separately, the District Court dismissed the individual defendant due to plaintiff-relator’s failure to timely serve the amended complaint upon her.

In March 2017, the plaintiff-relator initiated a second action by filing a Complaint in the Superior Court of the State of Delaware in Theresa Kelly v. Select Medical Corporation, Select Employment Services, Inc., and SSH‑Wilmington, C.A. No. N17C-03-293 CLS. The Delaware Complaint alleges that the defendants retaliated against her in violation of the Delaware Whistleblowers’ Protection Act for reporting the same alleged violations that are the subject of the federal Amended Complaint. The defendants filed a motion to dismiss, or alternatively to stay, the Delaware Complaint based on the pending federal Amended Complaint and the failure to allege facts to support a violation of the Delaware Whistleblowers’ Protection Act. In January 2018, the Court stayed the Delaware Complaint pending the outcome of the federal case.

The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.

Contract Therapy Subpoena. On May 18, 2017, the Company received a subpoena from the U.S. Attorney’s Office for the District of New Jersey seeking various documents principally relating to the Company’s contract therapy division, which contracted to furnish rehabilitation therapy services to residents of skilled nursing facilities (“SNFs”) and other providers. The Company operated its contract therapy division through a subsidiary until March 31, 2016, when the Company sold the stock of the subsidiary. The subpoena seeks documents that appear to be aimed at assessing whether therapy services were furnished and billed in compliance with Medicare SNF billing requirements, including whether therapy services were coded at inappropriate levels and whether excessive or unnecessary therapy was furnished to justify coding at higher paying levels. The Company does not know whether the subpoena has been issued in connection with a qui tam lawsuit or in connection with possible civil, criminal or administrative proceedings by the government. The Company is producing documents in response to the subpoena and intends to fully cooperate with this investigation. At this time, the Company is unable to predict the timing and outcome of this matter.


~~14.~~	~~Subsequent Events~~

~~Issuance and Sale~~14. Supplemental Financial Information of ~~Senior Notes~~

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of senior notes due August 15, 2026. Select intends to use a portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described below), to redeem in full Select’s $710 million 6.375% senior notes due 2021, to repay in full the outstanding borrowings under Select’s revolving credit facility, and pay related fees and expenses associated with the financing.

~~Amendment to Select Credit Facilities~~

On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement dated March 6, 2017. Among other things, the amendment (i) provided for an additional $500.0 million in term loans that, along with the existing Select term loan, have a maturity date of March 6, 2025, (ii) extended the maturity date of Select’s revolving credit facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.


~~15.~~	~~Condensed Consolidating Financial Information~~

Select’s 6.375% senior notes are fully and unconditionally and jointly and severally guaranteed, except for customary limitations, on a senior basis by all of Select’s wholly owned subsidiaries (the “Subsidiary Guarantors”). The Subsidiary Guarantors are defined as subsidiaries where Select, or a subsidiary of Select, holds all of the outstanding ownership interests. Certain of Select’s subsidiaries did not guarantee the 6.375% senior notes (the “Non-Guarantor Subsidiaries” and Concentra Group Holdings Parent ~~and its subsidiaries, “Non-Guarantor Concentra”).~~

~~Select conducts a significant portion of its business through its subsidiaries. Presented below is condensed consolidating~~

The following tables summarize selected financial information ~~for Select, the Subsidiary Guarantors, the Non-Guarantor Subsidiaries, and Non-Guarantor Concentra.~~of Concentra Group Holdings Parent.

The equity method has been used by Select with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.



	December 31, 2018		September 30, 2019
	(in thousands)
Assets
Current assets	$	385,094	$	287,514
Non-current assets	1,793,774		2,078,713
Total Assets	$	2,178,868	$	2,366,227
Liabilities and Equity
Current liabilities	$	206,386	$	232,035
Non-current liabilities	1,478,084		1,587,721
Total Liabilities	1,684,470		1,819,756
Redeemable non-controlling interests	18,525		17,268
Members' Equity of Concentra Group Holdings Parent	470,329		523,814
Non-controlling interests	5,544		5,389
Total Equity	475,873		529,203
Total Liabilities and Equity	$	2,178,868	$	2,366,227



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2019		2018		2019
	(in thousands)
Net operating revenues	$	404,481	$	421,900	$	1,173,420	$	1,231,672
Income from operations	43,499		52,922		123,776		144,350
Net income	16,084		17,788		45,576		53,521
Net income attributable to Select Medical Holdings Corporation	7,486		8,124		20,778		24,534



	Nine Months Ended September 30,
	2018			2019
	(in thousands)
Net cash provided by operating activities	$	119,147		$	104,234
Net cash used in investing activities	(545,856		)	(56,400		)
Net cash provided by (used in) financing activities	465,314			(185,717		)
Net increase (decrease) in cash and cash equivalents	38,605			(137,883		)
Cash and cash equivalents at beginning of period	113,059			163,116
Cash and cash equivalents at end of period	$	151,664		$	25,233

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

~~June 30, 2019~~

~~(unaudited)~~

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
ASSETS

Current Assets:

Cash and cash equivalents $ 78
$ 7,576
$ 3,256
$ 113,126
$ —
$ 124,036
Accounts receivable —
445,484
129,946
216,339
—
791,769
Intercompany receivables —
1,702,313
147,990
—
(1,850,303 ) (a) —
Prepaid income taxes 142
5,936
8
6,838
(606 ) (f) 12,318
Other current assets 29,306
32,072
9,923
28,641
—
99,942
Total Current Assets 29,526
2,193,381
291,123
364,944
(1,850,909 ) 1,028,065
Operating lease right-of-use assets 33,568
441,710
513,796
307,623
(325,312 ) (a) 971,385
Property and equipment, net 28,578
658,686
114,256
207,035
—
1,008,555
Investment in affiliates 4,543,196
175,551
—
—
(4,718,747 ) (b)(c) —
Goodwill —
2,150,658
—
1,234,736
—
3,385,394
Identifiable intangible assets, net 3
98,033
4,676
316,623
—
419,335
Other assets 34,285
236,642
16,524
16,426
(9,671 ) (e) 294,206
Total Assets $ 4,669,156
$ 5,954,661
$ 940,375
$ 2,447,387
$ (6,904,639 ) $ 7,106,940
LIABILITIES AND EQUITY

Current Liabilities:

Overdrafts $ 27,259
$ —
$ —
$ —
$ —
$ 27,259
Current operating lease liabilities 6,419
102,709
39,896
67,155
(13,695 ) (a) 202,484
Current portion of long-term debt and notes payable 6,376
524
192
1,920
—
9,012
Accounts payable 14,227
80,569
22,931
20,288
—
138,015
Intercompany payables 1,702,313
147,990
—
—
(1,850,303 ) (a) —
Accrued payroll 7,498
95,373
4,579
39,947
—
147,397
Accrued vacation 5,086
67,198
15,767
34,226
—
122,277
Accrued interest 5,282
35
6
4,911
—
10,234
Accrued other 63,952
64,262
14,735
41,298
—
184,247
Income taxes payable 8,333
3,082
47
911
(606 ) (f) 11,767
Total Current Liabilities 1,846,745
561,742
98,153
210,656
(1,864,604 ) 852,692
Non-current operating lease liabilities 30,244
363,883
455,165
251,521
(286,910 ) (a) 813,903
Long-term debt, net of current portion 1,918,283
9,473
55,050
1,366,896
—
3,349,702
Non-current deferred tax liability —
100,310
1,359
55,718
(9,671 ) (e) 147,716
Other non-current liabilities 27,875
63,035
3,235
33,117
(24,707 ) (a) 102,555
Total Liabilities 3,823,147
1,098,443
612,962
1,917,908
(2,185,892 ) 5,266,568
Redeemable non-controlling interests —
—
—
17,432
826,990
(d) 844,422
Stockholders’ Equity:

Common stock 0
—
—
—
—
0
Capital in excess of par 988,333
—
—
—
—
988,333
Retained earnings (accumulated deficit) (142,324 ) 1,613,283
(24,651 ) 45,806
(1,634,438 ) (c)(d) (142,324 )
Subsidiary investment —
3,242,935
352,064
460,757
(4,055,756 ) (b)(d) —
Total Select Medical Corporation Stockholders’ Equity 846,009
4,856,218
327,413
506,563
(5,690,194 ) 846,009
Non-controlling interests —
—
—
5,484
144,457
(d) 149,941
Total Equity 846,009
4,856,218
327,413
512,047
(5,545,737 ) 995,950
Total Liabilities and Equity $ 4,669,156
$ 5,954,661
$ 940,375
$ 2,447,387
$ (6,904,639 ) $ 7,106,940


~~(a)~~	~~Elimination of intercompany balances.~~


~~(b)~~	~~Elimination of investments in consolidated subsidiaries.~~


~~(c)~~	~~Elimination of investments in consolidated subsidiaries’ earnings.~~


~~(d)~~	~~Reclassification of equity attributable to non-controlling interests.~~


~~(e)~~	~~Reclassification to report net non-current deferred tax liability in consolidation.~~


~~(f)~~	~~Reclassification to report prepaid income taxes and income taxes payable by tax jurisdiction in consolidation.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Three Months Ended June 30, 2019~~

~~(unaudited)~~

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Net operating revenues $ —
$ 734,359
$ 213,554
$ 413,451
$ —
$ 1,361,364
Costs and expenses:

Cost of services, exclusive of depreciation and amortization 796
629,118
182,105
338,131
—
1,150,150
General and administrative 31,865
(526 ) —
—
—
31,339
Depreciation and amortization 2,213
22,866
5,435
24,479
—
54,993
Total costs and expenses 34,874
651,458
187,540
362,610
—
1,236,482
Income (loss) from operations (34,874 ) 82,901
26,014
50,841
—
124,882
Other income and expense:

Intercompany interest and royalty fees 4,705
(2,128 ) (2,204 ) (373 ) —
—
Intercompany management fees 57,738
(42,503 ) (15,235 ) —
—
—
Equity in earnings of unconsolidated subsidiaries —
7,370
24
—
—
7,394
Interest income (expense) (29,109 ) 8
(219 ) (22,144 ) —
(51,464 )
Income (loss) before income taxes (1,540 ) 45,648
8,380
28,324
—
80,812
Income tax expense 1,140
13,021
138
6,527
—
20,826
Equity in earnings of consolidated subsidiaries 47,496
4,687
—
—
(52,183 ) (a) —
Net income 44,816
37,314
8,242
21,797
(52,183 ) 59,986
Less: Net income attributable to non-controlling interests —
—
3,555
11,615
—
15,170
Net income attributable to Select Medical Corporation $ 44,816
$ 37,314
$ 4,687
$ 10,182
$ (52,183 ) $ 44,816


~~(a)~~	~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Six Months Ended June 30, 2019~~

~~(unaudited)~~

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Net operating revenues $ —
$ 1,454,189
$ 422,034
$ 809,772
$ —
$ 2,685,995
Costs and expenses:

Cost of services, exclusive of depreciation and amortization 1,535
1,253,593
358,153
668,961
—
2,282,242
General and administrative 60,562
(546 ) —
—
—
60,016
Depreciation and amortization 4,444
43,400
9,904
49,383
—
107,131
Total costs and expenses 66,541
1,296,447
368,057
718,344
—
2,449,389
Income (loss) from operations (66,541 ) 157,742
53,977
91,428
—
236,606
Other income and expense:

Intercompany interest and royalty fees 8,813
(3,230 ) (4,847 ) (736 ) —
—
Intercompany management fees 119,210
(91,273 ) (27,937 ) —
—
—
Equity in earnings of unconsolidated subsidiaries —
11,713
47
—
—
11,760
Non-operating gain —
6,532
—
—
—
6,532
Interest income (expense) (57,309 ) 128
(440 ) (44,654 ) —
(102,275 )
Income before income taxes 4,173
81,612
20,800
46,038
—
152,623
Income tax expense 1,197
27,246
545
10,305
—
39,293
Equity in earnings of consolidated subsidiaries 82,674
11,898
—
—
(94,572 ) (a) —
Net income 85,650
66,264
20,255
35,733
(94,572 ) 113,330
Less: Net income attributable to non-controlling interests —
—
8,357
19,323
—
27,680
Net income attributable to Select Medical Corporation $ 85,650
$ 66,264
$ 11,898
$ 16,410
$ (94,572 ) $ 85,650

~~_______________________________________________________________________________~~


~~(a)~~	~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Six Months Ended June 30, 2019~~

~~(unaudited)~~

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Operating activities

Net income $ 85,650
$ 66,264
$ 20,255
$ 35,733
$ (94,572 ) (a) $ 113,330
Adjustments to reconcile net income to net cash provided by operating activities:

Distributions from unconsolidated subsidiaries —
11,140
8
—
—
11,148
Depreciation and amortization 4,444
43,400
9,904
49,383
—
107,131
Provision for bad debts —
28
1,735
195
—
1,958
Equity in earnings of unconsolidated subsidiaries —
(11,713 ) (47 ) —
—
(11,760 )
Equity in earnings of consolidated subsidiaries (82,674 ) (11,898 ) —
—
94,572
(a) —
Loss (gain) on sale of assets and businesses 300
(6,617 ) (37 ) —
—
(6,354 )
Stock compensation expense 11,079
—
—
1,534
—
12,613
Amortization of debt discount, premium and issuance costs 3,226
—
—
3,100
—
6,326
Deferred income taxes (2,338 ) (401 ) 366
(3,917 ) —
(6,290 )
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable —
(47,838 ) (12,998 ) (25,037 ) —
(85,873 )
Other current assets (10,868 ) 558
2,624
(1,550 ) —
(9,236 )
Other assets (167 ) (1,019 ) (3,152 ) 3,734
(335 ) (b) (939 )
Accounts payable (46 ) 4,192
2,491
(3,967 ) —
2,670
Accrued expenses (8,649 ) 9,546
(773 ) (18,615 ) 335
(b) (18,156 )
Income taxes 18,425
491
(151 ) (2,419 ) —
16,346
Net cash provided by operating activities 18,382
56,133
20,225
38,174
—
132,914
Investing activities

Business combinations, net of cash acquired —
(61,861 ) (3,974 ) (20,227 ) —
(86,062 )
Purchases of property and equipment (2,415 ) (36,648 ) (22,284 ) (27,938 ) —
(89,285 )
Investment in businesses —
(52,057 ) (200 ) —
—
(52,257 )
Proceeds from sale of assets and businesses —
88
37
—
—
125
Net cash used in investing activities (2,415 ) (150,478 ) (26,421 ) (48,165 ) —
(227,479 )
Financing activities

Borrowings on revolving facilities 635,000
—
—
—
—
635,000
Payments on revolving facilities (460,000 ) —
—
—
—
(460,000 )
Payments on term loans (98,807 ) —
—
(33,878 ) —
(132,685 )
Borrowings of other debt 5,613
—
8,617
—
—
14,230
Principal payments on other debt (6,103 ) (245 ) (3,818 ) (2,514 ) —
(12,680 )
Dividends paid to Holdings (13,620 ) —
—
—
—
(13,620 )
Equity investment by Holdings 459
—
—
—
—
459
Intercompany (80,684 ) 94,742
(14,058 ) —
—
—
Increase in overdrafts 2,176
—
—
—
—
2,176
Proceeds from issuance of non-controlling interests —
—
18,288
—
—
18,288
Distributions to and purchases of non-controlling interests —
(150 ) (3,988 ) (3,607 ) —
(7,745 )
Net cash provided by (used in) financing activities (15,966 ) 94,347
5,041
(39,999 ) —
43,423
Net increase (decrease) in cash and cash equivalents 1
2
(1,155 ) (49,990 ) —
(51,142 )
Cash and cash equivalents at beginning of period 77
7,574
4,411
163,116
—
175,178
Cash and cash equivalents at end of period $ 78
$ 7,576
$ 3,256
$ 113,126
$ —
$ 124,036


~~(a)~~	~~Elimination of equity in earnings of consolidated subsidiaries.~~


~~(b)~~	~~Elimination of intercompany balances.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Balance Sheet~~

~~December 31, 2018~~

~~(unaudited)~~

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
ASSETS

Current Assets:

Cash and cash equivalents $ 77
$ 7,574
$ 4,411
$ 163,116
$ —
$ 175,178
Accounts receivable —
397,674
118,683
190,319
—
706,676
Intercompany receivables —
1,787,184
83,230
—
(1,870,414 ) (a) —
Prepaid income taxes 10,205
5,711
—
4,623
—
20,539
Other current assets 17,866
31,181
14,048
27,036
—
90,131
Total Current Assets 28,148
2,229,324
220,372
385,094
(1,870,414 ) 992,524
Property and equipment, net 30,103
625,947
103,006
220,754
—
979,810
Investment in affiliates 4,497,167
127,036
—
—
(4,624,203 ) (b)(c) —
Goodwill —
2,104,288
—
1,216,438
—
3,320,726
Identifiable intangible assets, net 3
102,120
5,020
330,550
—
437,693
Other assets 37,281
145,467
33,417
26,032
(8,685 ) (e) 233,512
Total Assets $ 4,592,702
$ 5,334,182
$ 361,815
$ 2,178,868
$ (6,503,302 ) $ 5,964,265
LIABILITIES AND EQUITY

Current Liabilities:

Overdrafts $ 25,083
$ —
$ —
$ —
$ —
$ 25,083
Current portion of long-term debt and notes payable 4,363
248
2,001
37,253
—
43,865
Accounts payable 14,033
84,343
20,956
27,361
—
146,693
Intercompany payables 1,787,184
83,230
—
—
(1,870,414 ) (a) —
Accrued payroll 15,533
99,803
5,936
51,114
—
172,386
Accrued vacation 4,613
60,989
13,942
31,116
—
110,660
Accrued interest 5,996
22
3
6,116
—
12,137
Accrued other 60,056
61,226
17,098
52,311
—
190,691
Income taxes payable —
2,366
190
1,115
—
3,671
Total Current Liabilities 1,916,861
392,227
60,126
206,386
(1,870,414 ) 705,186
Long-term debt, net of current portion 1,837,241
448
48,402
1,363,425
—
3,249,516
Non-current deferred tax liability —
101,214
994
60,372
(8,685 ) (e) 153,895
Other non-current liabilities 35,558
59,901
9,194
54,287
—
158,940
Total Liabilities 3,789,660
553,790
118,716
1,684,470
(1,879,099 ) 4,267,537
Redeemable non-controlling interests —
—
—
18,525
761,963
(d) 780,488
Stockholders’ Equity:

Common stock 0
—
—
—
—
0
Capital in excess of par 970,156
—
—
—
—
970,156
Retained earnings (accumulated deficit) (167,114 ) 1,547,018
(29,553 ) 12,355
(1,529,820 ) (c)(d) (167,114 )
Subsidiary investment —
3,233,374
272,652
457,974
(3,964,000 ) (b)(d) —
Total Select Medical Corporation Stockholders’ Equity 803,042
4,780,392
243,099
470,329
(5,493,820 ) 803,042
Non-controlling interests —
—
—
5,544
107,654
(d) 113,198
Total Equity 803,042
4,780,392
243,099
475,873
(5,386,166 ) 916,240
Total Liabilities and Equity $ 4,592,702
$ 5,334,182
$ 361,815
$ 2,178,868
$ (6,503,302 ) $ 5,964,265


~~(a)~~	~~Elimination of intercompany balances.~~


~~(b)~~	~~Elimination of investments in consolidated subsidiaries.~~


~~(c)~~	~~Elimination of investments in consolidated subsidiaries’ earnings.~~


~~(d)~~	~~Reclassification of equity attributable to non-controlling interests.~~


~~(e)~~	~~Reclassification to report net non-current deferred tax liability in consolidation.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Three Months Ended June 30, 2018~~

~~(unaudited)~~

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Net operating revenues $ (17 ) $ 690,766
$ 192,638
$ 412,823
$ —
$ 1,296,210
Costs and expenses:

Cost of services, exclusive of depreciation and amortization 799
589,707
162,832
341,393
—
1,094,731
General and administrative 29,208
27
—
(41 ) —
29,194
Depreciation and amortization 2,355
20,535
4,137
24,697
—
51,724
Total costs and expenses 32,362
610,269
166,969
366,049
—
1,175,649
Income (loss) from operations (32,379 ) 80,497
25,669
46,774
—
120,561
Other income and expense:

Intercompany interest and royalty fees 7,553
(3,629 ) (3,609 ) (315 ) —
—
Intercompany management fees 55,416
(43,931 ) (11,485 ) —
—
—
Equity in earnings of unconsolidated subsidiaries —
4,776
9
—
—
4,785
Non-operating gain 1,654
4,824
—
—
—
6,478
Interest income (expense) (29,412 ) 188
(186 ) (20,749 ) —
(50,159 )
Income before income taxes 2,832
42,725
10,398
25,710
—
81,665
Income tax expense 831
14,254
145
5,876
—
21,106
Equity in earnings of consolidated subsidiaries 44,510
6,840
—
—
(51,350 ) (a) —
Net income 46,511
35,311
10,253
19,834
(51,350 ) 60,559
Less: Net income attributable to non-controlling interests —
12
3,413
10,623
—
14,048
Net income attributable to Select Medical Corporation $ 46,511
$ 35,299
$ 6,840
$ 9,211
$ (51,350 ) $ 46,511


~~(a)~~	~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Operations~~

~~For the Six Months Ended June 30, 2018~~

~~(unaudited)~~

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Net operating revenues $ —
$ 1,397,178
$ 383,057
$ 768,939
$ —
$ 2,549,174
Costs and expenses:

Cost of services, exclusive of depreciation and amortization 1,525
1,197,733
321,363
639,923
—
2,160,544
General and administrative 58,015
66
—
2,895
—
60,976
Depreciation and amortization 4,562
39,982
8,107
45,844
—
98,495
Total costs and expenses 64,102
1,237,781
329,470
688,662
—
2,320,015
Income (loss) from operations (64,102 ) 159,397
53,587
80,277
—
229,159
Other income and expense:

Intercompany interest and royalty fees 15,672
(7,924 ) (7,240 ) (508 ) —
—
Intercompany management fees 116,148
(93,471 ) (22,677 ) —
—
—
Loss on early retirement of debt (2,229 ) —
—
(8,026 ) —
(10,255 )
Equity in earnings of unconsolidated subsidiaries —
9,460
22
—
—
9,482
Non-operating gain 1,654
5,223
—
—
—
6,877
Interest income (expense) (60,483 ) 121
(337 ) (36,623 ) —
(97,322 )
Income before income taxes 6,660
72,806
23,355
35,120
—
137,941
Income tax expense 1,345
26,189
238
5,628
—
33,400
Equity in earnings of consolidated subsidiaries 74,935
15,123
—
—
(90,058 ) (a) —
Net income 80,250
61,740
23,117
29,492
(90,058 ) 104,541
Less: Net income attributable to non-controlling interests —
97
7,994
16,200
—
24,291
Net income attributable to Select Medical Corporation $ 80,250
$ 61,643
$ 15,123
$ 13,292
$ (90,058 ) $ 80,250


~~(a)~~	~~Elimination of equity in earnings of consolidated subsidiaries.~~

~~Select Medical Corporation~~

~~Condensed Consolidating Statement of Cash Flows~~

~~For the Six Months Ended June 30, 2018~~

~~(unaudited)~~

Select
(Parent
Company
Only)

Subsidiary
Guarantors

Non-Guarantor
Subsidiaries

Non-Guarantor
Concentra

Consolidating
and Eliminating
Adjustments

Consolidated
Select Medical
Corporation
(in thousands)
Operating activities

Net income $ 80,250
$ 61,740
$ 23,117
$ 29,492
$ (90,058 ) (a) $ 104,541
Adjustments to reconcile net income to net cash provided by operating activities:

Distributions from unconsolidated subsidiaries —
7,800
30
—
—
7,830
Depreciation and amortization 4,562
39,982
8,107
45,844
—
98,495
Provision for bad debts —
41
—
61
—
102
Equity in earnings of unconsolidated subsidiaries —
(9,460 ) (22 ) —
—
(9,482 )
Equity in earnings of consolidated subsidiaries (74,935 ) (15,123 ) —
—
90,058
(a) —
Loss on extinguishment of debt 115
—
—
369
—
484
Gain on sale of assets and businesses (1,642 ) (5,338 ) —
—
—
(6,980 )
Stock compensation expense 9,562
—
—
1,349
—
10,911
Amortization of debt discount, premium and issuance costs 3,553
—
—
2,933
—
6,486
Deferred income taxes 664
1,056
40
(3,451 ) —
(1,691 )
Changes in operating assets and liabilities, net of effects of business combinations:

Accounts receivable —
9,838
(6,857 ) (8,755 ) —
(5,774 )
Other current assets (876 ) 1,927
2,956
(7,018 ) —
(3,011 )
Other assets 945
(9,261 ) 1,110
13,890
—
6,684
Accounts payable (1,470 ) (7,516 ) 1,864
1,660
—
(5,462 )
Accrued expenses (15,020 ) 14,589
4,914
(3,276 ) —
1,207
Income taxes 14,757
4,401
1
(6,549 ) —
12,610
Net cash provided by operating activities 20,465
94,676
35,260
66,549
—
216,950
Investing activities

Business combinations, net of cash acquired —
(2,666 ) (22 ) (515,016 ) —
(517,704 )
Purchases of property and equipment (5,232 ) (44,865 ) (14,809 ) (16,742 ) —
(81,648 )
Investment in businesses —
(3,286 ) —
(5 ) —
(3,291 )
Proceeds from sale of assets and businesses 1,655
5,017
—
—
—
6,672
Net cash used in investing activities (3,577 ) (45,800 ) (14,831 ) (531,763 ) —
(595,971 )
Financing activities

Borrowings on revolving facilities 265,000
—
—
—
—
265,000
Payments on revolving facilities (345,000 ) —
—
—
—
(345,000 )
Proceeds from term loans (financing costs) (11 ) —
—
779,915
—
779,904
Payments on term loans (5,750 ) —
—
—
—
(5,750 )
Revolving facility debt issuance costs (837 ) —
—
(496 ) —
(1,333 )
Borrowings of other debt 5,549
—
9,820
4,559
—
19,928
Principal payments on other debt (5,987 ) (261 ) (2,400 ) (2,873 ) —
(11,521 )
Dividends paid to Holdings (889 ) —
—
—
—
(889 )
Equity investment by Holdings 1,620
—
—
—
—
1,620
Intercompany 90,589
(45,661 ) (27,290 ) (17,638 ) —
—
Decrease in overdrafts (6,171 ) —
—
—
—
(6,171 )
Proceeds from issuance of non-controlling interests —
—
957
1,969
—
2,926
Distributions to non-controlling interests —
(1,450 ) (1,681 ) (298,082 ) —
(301,213 )
Net cash provided by (used in) financing activities (1,887 ) (47,372 ) (20,594 ) 467,354
—
397,501
Net increase (decrease) in cash and cash equivalents 15,001
1,504
(165 ) 2,140
—
18,480
Cash and cash equivalents at beginning of period 73
4,856
4,561
113,059
—
122,549
Cash and cash equivalents at end of period $ 15,074
$ 6,360
$ 4,396
$ 115,199
$ —
$ 141,029

~~_______________________________________________________________________________~~


~~(a)~~	~~Elimination of equity in earnings of consolidated subsidiaries.~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes.

Forward-Looking Statements

This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “target,” “estimate,” “project,” “intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs, and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our services, the expansion of our services, competitive conditions, and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

changes in government reimbursement for our services and/or new payment policies may result in a reduction in net operating revenues, an increase in costs, and a reduction in profitability;

the failure of our Medicare-certified long term care hospitals or inpatient rehabilitation facilities to maintain their Medicare certifications may cause our net operating revenues and profitability to decline;


•	the failure of our Medicare-certified long term care hospitals and inpatient rehabilitation facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;

a government investigation or assertion that we have violated applicable regulations may result in sanctions or reputational harm and increased costs;

acquisitions or joint ventures may prove difficult or unsuccessful, use significant resources, or expose us to unforeseen liabilities;

our plans and expectations related to our acquisitions, including the acquisition of U.S. HealthWorks by Concentra, and our ability to realize anticipated synergies;

private third-party payors for our services may adopt payment policies that could limit our future net operating revenues and profitability;

the failure to maintain established relationships with the physicians in the areas we serve could reduce our net operating revenues and profitability;

shortages in qualified nurses, therapists, physicians, or other licensed providers could increase our operating costs significantly or limit our ability to staff our facilities;

competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;

the loss of key members of our management team could significantly disrupt our operations;

the effect of claims asserted against us could subject us to substantial uninsured liabilities;

a security breach of our or our third-party vendors’ information technology systems may subject us to potential legal and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 or the Health Information Technology for Economic and Clinical Health Act; and

other factors discussed from time to time in our filings with the SEC, including factors discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, as such risk factors may be updated from time to time in our periodic filings with the SEC.

Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results or performance.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to securities analysts any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any securities analyst irrespective of the content of the statement or report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

Overview

We began operations in 1997 and, based on number of facilities, are one of the largest operators of critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics, and occupational health centers in the United States. As of ~~June~~September 30, 2019, we had operations in 47 states and the District of Columbia. We operated 100 critical illness recovery hospitals in 28 states, 2829 rehabilitation hospitals in 12 states, and ~~1,695~~1,707 outpatient rehabilitation clinics in 37 states and the District of Columbia. Concentra, a joint venture subsidiary, operated ~~526~~523 occupational health centers in 41 states as of ~~June~~September 30, 2019. Concentra also provides contract services at employer worksites and Department of Veterans Affairs community-based outpatient clinics (“CBOCs”).

Our reportable segments include the critical illness recovery hospital segment, the rehabilitation hospital segment, the outpatient rehabilitation segment, and the Concentra segment. We had net operating revenues of ~~$2,686.0~~$4,079.3 million for the ~~six~~nine months ended ~~June~~September 30, 2019. Of this total, we earned approximately 34% of our net operating revenues from our critical illness recovery hospital segment, approximately 12% from our rehabilitation hospital segment, approximately 19% from our outpatient rehabilitation segment, and approximately 30% from our Concentra segment. Our critical illness recovery hospital segment consists of hospitals designed to serve the needs of patients recovering from critical illnesses, often with complex medical needs, and our rehabilitation hospital segment consists of hospitals designed to serve patients that require intensive physical rehabilitation care. Patients are typically admitted to our critical illness recovery hospitals and rehabilitation hospitals from general acute care hospitals. Our outpatient rehabilitation segment consists of clinics that provide physical, occupational, and speech rehabilitation services. Our Concentra segment consists of occupational health centers that provide workers’ compensation injury care, physical therapy, and consumer health services as well as onsite clinics located at employer worksites that deliver occupational medicine services. Additionally, our Concentra segment delivers veteran’s healthcare through its Department of Veterans Affairs CBOCs. During ~~the three months ended June 30,~~ 2019, we began reporting the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries as part of our other activities. Previously, these services were reflected in the financial results of our reportable segments. Under these employee leasing arrangements, actual labor costs are passed through to our non-consolidating subsidiaries, resulting in our recognition of net operating revenues equal to the actual labor costs incurred. Prior year results presented herein have been changed to conform to the current presentation.

Non-GAAP Measure

We believe that the presentation of Adjusted EBITDA, as defined below, is important to investors because Adjusted EBITDA is commonly used as an analytical indicator of performance by investors within the healthcare industry. Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating segments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”). Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income, income from operations, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because Adjusted EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying definitions, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies.

We define Adjusted EBITDA as earnings excluding interest, income taxes, depreciation and amortization, gain (loss) on early retirement of debt, stock compensation expense, acquisition costs associated with U.S. HealthWorks, ~~non-operating~~ gain (loss), on sale of businesses, and equity in earnings (losses) of unconsolidated subsidiaries. We will refer to Adjusted EBITDA throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The table below reconciles net income and income from operations to Adjusted EBITDA and should be referenced when we discuss Adjusted EBITDA:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2019			2018			2019			2018			2019			2018			2019
	(in thousands)												(in thousands)
Net income	$	60,559		$	59,986		$	104,541		$	113,330		$	42,679		$	44,030		$	147,220		$	157,360
Income tax expense	21,106			20,826			33,400			39,293			14,060			12,847			47,460			52,140
Interest expense	50,159			51,464			97,322			102,275			50,669			54,336			147,991			156,611
Non-operating gain	(6,478		)	—			(6,877		)	(6,532		)
Gain on sale of businesses													(2,139		)	—			(9,016		)	(6,532		)
Equity in earnings of unconsolidated subsidiaries	(4,785		)	(7,394		)	(9,482		)	(11,760		)	(5,432		)	(6,950		)	(14,914		)	(18,710		)
Loss on early retirement of debt	—			—			10,255			—			—			18,643			10,255			18,643
Income from operations	120,561			124,882			229,159			236,606			99,837			122,906			328,996			359,512
Stock compensation expense:
Included in general and administrative	4,047			4,796			8,037			9,544			4,683			5,305			12,720			14,849
Included in cost of services	1,937			1,562			2,874			3,069			1,581			1,513			4,455			4,582
Depreciation and amortization	51,724			54,993			98,495			107,131			50,527			52,941			149,022			160,072
U.S. HealthWorks acquisition costs	(41		)	—			2,895			—			—			—			2,895			—
Adjusted EBITDA	$	178,228		$	186,233		$	341,460		$	356,350		$	156,628		$	182,665		$	498,088		$	539,015

Summary Financial Results

Three Months Ended ~~June~~September 30, 2019

For the three months ended ~~June~~September 30, 2019, our net operating revenues increased ~~5.0%~~9.9% to ~~$1,361.4~~$1,393.3 million, compared to ~~$1,296.2~~$1,267.4 million for the three months ended ~~June~~September 30, 2018. Income from operations increased ~~3.6%~~23.1% to ~~$124.9~~$122.9 million for the three months ended ~~June~~September 30, 2019, compared to ~~$120.6~~$99.8 million for the three months ended ~~June~~September 30, 2018.

Net income ~~was $60.0~~increased 3.2% to $44.0 million for the three months ended ~~June~~September 30, 2019, compared to ~~$60.6~~$42.7 million for the three months ended ~~June~~September 30, 2018. Net income included a pre-tax ~~non-operating gain~~losses on early retirement of ~~$6.5~~debt of $18.6 million for the three months ended ~~June~~September 30, 2019. Net income included a pre-tax gain on sale of businesses of $2.1 million for the three months ended September 30, 2018.

Adjusted EBITDA increased ~~4.5%~~16.6% to ~~$186.2~~$182.7 million for the three months ended ~~June~~September 30, 2019, compared to ~~$178.2~~$156.6 million for the three months ended ~~June~~September 30, 2018. Our Adjusted EBITDA margin was ~~13.7%~~13.1% for ~~both~~ the three months ended ~~June~~September 30, 2019, ~~and~~compared to 12.4% for the three months ended September 30, 2018.

The following tables reconcile our segment performance measures to our consolidated operating results:


	Three Months Ended June 30, 2019																		Three Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Net operating revenues	$	461,143		$	160,374		$	261,891		$	413,451		$	64,505		$	1,361,364		$	462,892		$	173,369		$	265,330		$	421,900		$	69,852		$	1,393,343
Operating expenses	397,005			130,406			219,307			338,131			96,640			1,181,489			405,645			136,589			225,290			344,989			104,983			1,217,496
Depreciation and amortization	14,495			6,696			6,991			24,479			2,332			54,993			12,484			7,234			6,887			23,989			2,347			52,941
Income (loss) from operations	$	49,643		$	23,272		$	35,593		$	50,841		$	(34,467	)	$	124,882		$	44,763		$	29,546		$	33,153		$	52,922		$	(37,478	)	$	122,906
Depreciation and amortization	14,495			6,696			6,991			24,479			2,332			54,993			12,484			7,234			6,887			23,989			2,347			52,941
Stock compensation expense	—			—			—			767			5,591			6,358			—			—			—			768			6,050			6,818
Adjusted EBITDA	$	64,138		$	29,968		$	42,584		$	76,087		$	(26,544	)	$	186,233		$	57,247		$	36,780		$	40,040		$	77,679		$	(29,081	)	$	182,665
Adjusted EBITDA margin	13.9		%	18.7		%	16.3		%	18.4		%	N/M			13.7		%	12.4		%	21.2		%	15.1		%	18.4		%	N/M			13.1		%


	Three Months Ended June 30, 2018																		Three Months Ended September 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Net operating revenues⁽¹⁾	$	442,452		$	144,779		$	253,914		$	412,823		$	42,242		$	1,296,210		$	420,108		$	144,588		$	245,234		$	404,481		$	52,990		$	1,267,401
Operating expenses⁽¹⁾	381,727			116,584			211,967			341,352			72,295			1,123,925			366,816			119,245			210,703			336,494			83,779			1,117,037
Depreciation and amortization	11,952			6,015			6,704			24,697			2,356			51,724			11,136			6,079			6,597			24,488			2,227			50,527
Income (loss) from operations	$	48,773		$	22,180		$	35,243		$	46,774		$	(32,409	)	$	120,561		$	42,156		$	19,264		$	27,934		$	43,499		$	(33,016	)	$	99,837
Depreciation and amortization	11,952			6,015			6,704			24,697			2,356			51,724			11,136			6,079			6,597			24,488			2,227			50,527
Stock compensation expense	—			—			—			1,138			4,846			5,984			—			—			—			767			5,497			6,264
U.S. HealthWorks acquisition costs	—			—			—			(41		)	—			(41		)
Adjusted EBITDA	$	60,725		$	28,195		$	41,947		$	72,568		$	(25,207	)	$	178,228		$	53,292		$	25,343		$	34,531		$	68,754		$	(25,292	)	$	156,628
Adjusted EBITDA margin	13.7		%	19.5		%	16.5		%	17.6		%	N/M			13.7		%	12.7		%	17.5		%	14.1		%	17.0		%	N/M			12.4		%

The following table summarizes changes in segment performance measures for the three months ended ~~June~~September 30, 2019, compared to the three months ended ~~June~~September 30, 2018:


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	4.2	%	10.8	%	3.1	%	0.2	%	52.7	%	5.0	%	10.2	%	19.9	%	8.2	%	4.3	%	31.8	%	9.9	%
Change in income from operations	1.8	%	4.9	%	1.0	%	8.7	%	(6.4	)%	3.6	%	6.2	%	53.4	%	18.7	%	21.7	%	(13.5	)%	23.1	%
Change in Adjusted EBITDA	5.6	%	6.3	%	1.5	%	4.8	%	(5.3	)%	4.5	%	7.4	%	45.1	%	16.0	%	13.0	%	(15.0	)%	16.6	%

_______________________________________________________________________________

N/M — Not meaningful.


(1)	For the three months ended ~~June~~September 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

~~Six~~Nine Months Ended ~~June~~September 30, 2019

For the ~~six~~nine months ended ~~June~~September 30, 2019, our net operating revenues increased ~~5.4%~~6.9% to ~~$2,686.0~~$4,079.3 million, compared to ~~$2,549.2~~$3,816.6 million for the ~~six~~nine months ended ~~June~~September 30, 2018. Income from operations increased ~~3.2%~~9.3% to ~~$236.6~~$359.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$229.2~~$329.0 million for the ~~six~~nine months ended ~~June~~September 30, 2018.

Net income increased ~~8.4%~~6.9% to ~~$113.3~~$157.4 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$104.5~~$147.2 million for the ~~six~~nine months ended ~~June~~September 30, 2018. Net income included pre-tax losses on early retirement of debt of $18.6 million and a pre-tax ~~non-operating~~ gain on sale of businesses of $6.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019. Net income included pre-tax losses on early retirement of debt of $10.3 million, pre-tax ~~non-operating~~ gains on sales of ~~$6.9~~businesses of $9.0 million, and pre-tax U.S. HealthWorks acquisition costs of $2.9 million for the ~~six~~nine months ended ~~June~~September 30, 2018.

Adjusted EBITDA increased ~~4.4%~~8.2% to ~~$356.4~~$539.0 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$341.5~~$498.1 million for the ~~six~~nine months ended ~~June~~September 30, 2018. Our Adjusted EBITDA margin was ~~13.3%~~13.2% for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~13.4%~~13.1% for the ~~six~~nine months ended ~~June~~September 30, 2018.

The following tables reconcile our segment performance measures to our consolidated operating results:


	Six Months Ended June 30, 2019																		Nine Months Ended September 30, 2019
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Net operating revenues	$	918,677		$	314,932		$	508,796		$	809,772		$	133,818		$	2,685,995		$	1,381,569		$	488,301		$	774,126		$	1,231,672		$	203,670		$	4,079,338
Operating expenses	781,541			259,167			437,221			668,961			195,368			2,342,258			1,187,186			395,756			662,511			1,013,950			300,351			3,559,754
Depreciation and amortization	25,946			13,098			14,023			49,383			4,681			107,131			38,430			20,332			20,910			73,372			7,028			160,072
Income (loss) from operations	$	111,190		$	42,667		$	57,552		$	91,428		$	(66,231	)	$	236,606		$	155,953		$	72,213		$	90,705		$	144,350		$	(103,709	)	$	359,512
Depreciation and amortization	25,946			13,098			14,023			49,383			4,681			107,131			38,430			20,332			20,910			73,372			7,028			160,072
Stock compensation expense	—			—			—			1,534			11,079			12,613			—			—			—			2,302			17,129			19,431
Adjusted EBITDA	$	137,136		$	55,765		$	71,575		$	142,345		$	(50,471	)	$	356,350		$	194,383		$	92,545		$	111,615		$	220,024		$	(79,552	)	$	539,015
Adjusted EBITDA margin	14.9		%	17.7		%	14.1		%	17.6		%	N/M			13.3		%	14.1		%	19.0		%	14.4		%	17.9		%	N/M			13.2		%


	Six Months Ended June 30, 2018																		Nine Months Ended September 30, 2018
	Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total			Critical Illness Recovery Hospital			Rehabilitation Hospital			Outpatient Rehabilitation			Concentra			Other			Total
	(in thousands)																		(in thousands)
Net operating revenues⁽¹⁾	$	907,128		$	288,087		$	498,145		$	768,939		$	86,875		$	2,549,174		$	1,327,236		$	432,675		$	743,379		$	1,173,420		$	139,865		$	3,816,575
Operating expenses⁽¹⁾	773,431			233,116			425,673			642,818			146,482			2,221,520			1,140,247			352,361			636,376			979,312			230,261			3,338,557
Depreciation and amortization	23,010			11,737			13,341			45,844			4,563			98,495			34,146			17,816			19,938			70,332			6,790			149,022
Income (loss) from operations	$	110,687		$	43,234		$	59,131		$	80,277		$	(64,170	)	$	229,159		$	152,843		$	62,498		$	87,065		$	123,776		$	(97,186	)	$	328,996
Depreciation and amortization	23,010			11,737			13,341			45,844			4,563			98,495			34,146			17,816			19,938			70,332			6,790			149,022
Stock compensation expense	—			—			—			1,349			9,562			10,911			—			—			—			2,116			15,059			17,175
U.S. HealthWorks acquisition costs	—			—			—			2,895			—			2,895			—			—			—			2,895			—			2,895
Adjusted EBITDA	$	133,697		$	54,971		$	72,472		$	130,365		$	(50,045	)	$	341,460		$	186,989		$	80,314		$	107,003		$	199,119		$	(75,337	)	$	498,088
Adjusted EBITDA margin	14.7		%	19.1		%	14.5		%	17.0		%	N/M			13.4		%	14.1		%	18.6		%	14.4		%	17.0		%	N/M			13.1		%

The following table summarizes changes in segment performance measures for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to the ~~six~~nine months ended ~~June~~September 30, 2018:


	Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total		Critical Illness Recovery Hospital		Rehabilitation Hospital		Outpatient Rehabilitation		Concentra		Other		Total
Change in net operating revenues	1.3	%	9.3	%	2.1	%	5.3	%	54.0	%	5.4	%	4.1	%	12.9	%	4.1	%	5.0	%	45.6	%	6.9	%
Change in income from operations	0.5	%	(1.3	)%	(2.7	)%	13.9	%	(3.2	)%	3.2	%	2.0	%	15.5	%	4.2	%	16.6	%	(6.7	)%	9.3	%
Change in Adjusted EBITDA	2.6	%	1.4	%	(1.2	)%	9.2	%	(0.9	)%	4.4	%	4.0	%	15.2	%	4.3	%	10.5	%	(5.6	)%	8.2	%

_______________________________________________________________________________

N/M — Not meaningful.


(1)	For the ~~six~~nine months ended ~~June~~September 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

Significant Events

Select 6.250% Senior Notes

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior notes due August 15, 2026. Select used a portion of the net proceeds of the 6.250% senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described below) in part to (i) redeem in full the $710.0 million aggregate principal amount of the 6.375% senior notes on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the outstanding borrowings under Select’s revolving facility, and (iii) pay related fees and expenses associated with the financing.

Select Credit Facilities

Concentra Credit Facilities

Regulatory Changes

Our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019, contains a detailed discussion of the regulations that affect our business in Part I — Business — Government Regulations. The following is a discussion of some of the more significant healthcare regulatory changes that have affected our financial performance in the periods covered by this report or are likely to affect our financial performance and financial condition in the future. The information below should be read in conjunction with the more detailed discussion of regulations contained in our Form 10-K.

Medicare Reimbursement

The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and CMS. Net operating revenues generated directly from the Medicare program represented approximately 26% of our net operating revenues for the ~~six~~nine months ended ~~June~~September 30, 2019, and 27% of our net operating revenues for the year ended December 31, 2018.

Medicare Reimbursement of LTCH Services

~~There have been~~The following is a summary of significant regulatory changes affecting our critical illness recovery hospitals, which are certified by Medicare as long term care hospitals (“LTCHs”), as well as the policies and payment rates that ~~have affected~~may affect our ~~net operating revenues and, in some cases, caused us to change our operating models and strategies. We have been subject to regulatory changes that occur through the rulemaking procedures~~future results of ~~CMS. All~~operations. Medicare payments to our critical illness recovery hospitals are made in accordance with the long term care hospital prospective payment system (“LTCH-PPS”).

The following is a summary of significant changes to LTCH-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.

Fiscal Year 2018. On August 14, 2017, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). Certain errors in the final rule published on August 14, 2017 were corrected in a final rule published October 4, 2017. The standard federal rate was set at $41,415, a decrease from the standard federal rate applicable during fiscal year 2017 of $42,476. The update to the standard federal rate for fiscal year 2018 included a market basket increase of 2.7%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the Affordable Care Act (“ACA”). The update to the standard federal rate for fiscal year 2018 was further impacted by the Medicare Access and CHIP Reauthorization Act of 2015, which limits the update for fiscal year 2018 to 1.0%. The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,381, an increase from the fixed-loss amount in the 2017 fiscal year of $21,943. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $26,537, an increase from the fixed-loss amount in the 2017 fiscal year of $23,573.

Fiscal Year 2019. On August 17, 2018, CMS published the final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). Certain errors in the final rule were corrected in a final rule published October 3, 2018. The standard federal rate was set at $41,559, an increase from the standard federal rate applicable during fiscal year 2018 of $41,415. The update to the standard federal rate for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. The standard federal rate also included an area wage budget neutrality factor of 0.999215 and a temporary, one-time budget neutrality adjustment of 0.990878 in connection with the elimination of the 25 Percent Rule (discussed herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS was set at $27,121, a decrease from the fixed-loss amount in the 2018 fiscal year of $27,381. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate was set at $25,743, a decrease from the fixed-loss amount in the 2018 fiscal year of $26,537.

Fiscal Year 2020. On ~~May 3,~~August 16, 2019, CMS published the ~~proposed~~final rule updating policies and payment rates for the LTCH-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). Certain errors in the final rule were corrected in a final rule published October 8, 2019. The standard federal rate ~~would be~~was set at ~~$42,951,~~$42,678, an increase from the standard federal rate applicable during fiscal year 2019 of $41,559. The update to the standard federal rate for fiscal year 2020 ~~if adopted, includes~~included a market basket increase of ~~3.2%~~2.9%, less a productivity adjustment of ~~0.5%~~0.4%. The standard federal rate also ~~includes~~included an area wage budget neutrality factor of ~~1.0064747~~1.0020203 and a temporary, one-time budget neutrality adjustment of ~~0.999856~~0.999858 in connection with the elimination of the 25 Percent Rule (discussed herein). The fixed-loss amount for high cost outlier cases paid under LTCH-PPS ~~if adopted, would be~~was set at ~~$29,997, which is an increase~~$26,778, a decrease from the fixed-loss amount in the 2019 fiscal year of $27,121. The fixed-loss amount for high cost outlier cases paid under the site-neutral payment rate ~~if adopted, would be~~was set at ~~$26,994,~~$26,552, an increase from the fixed-loss amount in the 2019 fiscal year of $25,743. For LTCH discharges occurring in cost reporting periods beginning in FY 2020, site neutral payment rate cases will begin to be paid fully on the site neutral payment rate, rather than the transitional blended rate.

25 Percent Rule

The “25 Percent Rule” was a downward payment adjustment that applied if the percentage of Medicare patients discharged from LTCHs who were admitted from a referring hospital (regardless of whether the LTCH or LTCH satellite is co-located with the referring hospital) exceeded the applicable percentage admissions threshold during a particular cost reporting period.

For fiscal year 2018, CMS adopted a regulatory moratorium on the implementation of the 25 Percent Rule.

For fiscal year 2019 and thereafter, CMS eliminated the 25 Percent Rule entirely. The elimination of the 25 Percent Rule is being implemented in a budget neutral manner by adjusting the standard federal payment rates down such that the projection of aggregate LTCH payments would equal the projection of aggregate LTCH payments that would have been paid if the moratorium ended and the 25 Percent Rule went into effect on October 1, 2018. As a result, the elimination of the 25 Percent Rule includes a temporary, one-time adjustment to the fiscal year 2019 LTCH-PPS standard federal payment rate, a temporary, one-time adjustment to the fiscal year 2020 LTCH-PPS standard federal payment rate, and a permanent, one-time adjustment to the LTCH-PPS standard federal payment rate in fiscal years 2021 and subsequent years.

Medicare Reimbursement of IRF Services

The following is a summary of significant regulatory changes affecting our rehabilitation hospitals, which are certified by Medicare as inpatient rehabilitation facilities (“IRFs”), as well as the policies and payment rates that may affect our future results of operations. Medicare payments to our rehabilitation hospitals are made in accordance with the inpatient rehabilitation facility prospective payment system (“IRF-PPS”).

The following is a summary of significant changes to IRF-PPS which have affected our results of operations, as well as the policies and payment rates that may affect our future results of operations.

Fiscal Year 2018. On August 3, 2017, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2018 (affecting discharges and cost reporting periods beginning on or after October 1, 2017 through September 30, 2018). The standard payment conversion factor for discharges for fiscal year 2018 was set at $15,838, an increase from the standard payment conversion factor applicable during fiscal year 2017 of $15,708. The update to the standard payment conversion factor for fiscal year 2018 included a market basket increase of 2.6%, less a productivity adjustment of 0.6%, and less a reduction of 0.75% mandated by the ACA. The standard payment conversion factor for fiscal year 2018 was further impacted by the Medicare Access and CHIP Reauthorization Act of 2015, which limited the update for fiscal year 2018 to 1.0%. CMS increased the outlier threshold amount for fiscal year 2018 to $8,679 from $7,984 established in the final rule for fiscal year 2017.

Fiscal Year 2019. On August 6, 2018, CMS published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2019 (affecting discharges and cost reporting periods beginning on or after October 1, 2018 through September 30, 2019). The standard payment conversion factor for discharges for fiscal year 2019 was set at $16,021, an increase from the standard payment conversion factor applicable during fiscal year 2018 of $15,838. The update to the standard payment conversion factor for fiscal year 2019 included a market basket increase of 2.9%, less a productivity adjustment of 0.8%, and less a reduction of 0.75% mandated by the ACA. CMS increased the outlier threshold amount for fiscal year 2019 to $9,402 from $8,679 established in the final rule for fiscal year 2018.

Fiscal Year 2020. On ~~July 31,~~August 8, 2019, CMS ~~released an advanced copy of~~published the final rule updating policies and payment rates for the IRF-PPS for fiscal year 2020 (affecting discharges and cost reporting periods beginning on or after October 1, 2019 through September 30, 2020). The standard payment conversion factor for discharges for fiscal year 2020 was set at $16,489, an increase from the standard payment conversion factor applicable during fiscal year 2019 of $16,021. The update to the standard payment conversion factor for fiscal year 2020 included a market basket increase of 2.9%, less a productivity adjustment of 0.4%. CMS ~~increased~~decreased the outlier threshold amount for fiscal year 2020 to ~~$9,935~~$9,300 from $9,402 established in the final rule for fiscal year 2019.

Medicare Reimbursement of Outpatient Rehabilitation Clinic Services

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare physician fee schedule. For services provided in 2017 through 2019, a 0.5% update was applied each year to the fee schedule payment rates, subject to an adjustment beginning in 2019 under the Merit‑Based Incentive Payment System (“MIPS”). For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, subject to adjustments under MIPS and the alternative payment models (“APMs”). In 2026 and subsequent years, eligible professionals participating in APMs who meet certain criteria would receive annual updates of 0.75%, while all other professionals would receive annual updates of 0.25%.

Beginning in 2019, payments under the fee schedule are subject to adjustment based on performance in MIPS, which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements an eligible clinician’s performance is assessed according to established performance standards and used to determine an adjustment factor that is then applied to the clinician’s payment for a year. Each year from 2019 through 2024 eligible clinicians who receive a significant share of their revenues through an APM (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors.

Modifiers to Identify Services of Physical Therapy Assistants or Occupational Therapy Assistants

In the Medicare Physician Fee Schedule final rule for calendar year 2019, CMS established two new modifiers to identify services furnished in whole or in part by physical therapy assistants (“PTAs”) or occupational therapy assistants (“OTAs”). These modifiers were mandated by the Bipartisan Budget Act of 2018, which requires that claims for outpatient therapy services furnished in whole or part by therapy assistants on or after January 1, 2020 include the appropriate modifier. CMS intends to use these modifiers to implement a payment differential that would reimburse services provided by PTAs and OTAs at 85% of the fee schedule rate beginning on January 1, 2022.

Operating Statistics

The following table sets forth operating statistics for each of our segments for the periods presented. The operating statistics reflect data for the period of time we managed these operations.


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2019			2018			2019			2018			2019			2018			2019
Critical illness recovery hospital data:
Number of hospitals owned—start of period	99			96			99			96			98			99			99			96
Number of hospitals acquired	—			3			—			3			—			—			—			3
Number of hospital start-ups	—			—			1			—			—			—			1			—
Number of hospitals closed/sold	(1		)	—			(2		)	—			(1		)	—			(3		)	—
Number of hospitals owned—end of period	98			99			98			99			97			99			97			99
Number of hospitals managed—end of period	—			1			—			1			—			1			—			1
Total number of hospitals (all)—end of period	98			100			98			100			97			100			97			100
Available licensed beds⁽¹⁾	4,124			4,230			4,124			4,230			4,095			4,230			4,095			4,230
Admissions⁽¹⁾	9,121			9,172			18,954			18,628			8,651			9,051			27,605			27,679
Patient days⁽¹⁾	256,132			262,860			521,972			520,989			243,891			258,089			765,863			779,078
Average length of stay (days)⁽¹⁾	28			28			28			28			28			28			28			28
Net revenue per patient day⁽¹⁾⁽²⁾	$	1,710		$	1,739		$	1,721		$	1,749		$	1,705		$	1,773		$	1,716		$	1,757
Occupancy rate⁽¹⁾	68		%	69		%	69		%	70		%	65		%	67		%	68		%	69		%
Percent patient days—Medicare⁽¹⁾	53		%	50		%	53		%	52		%	53		%	49		%	53		%	51		%
Rehabilitation hospital data:
Number of hospitals owned—start of period	16			18			16			17			17			19			16			17
Number of hospitals start-ups	1			1			1			2			—			—			1			2
Number of hospitals owned—end of period	17			19			17			19			17			19			17			19
Number of hospitals managed—end of period	9			9			9			9			9			10			9			10
Total number of hospitals (all)—end of period	26			28			26			28			26			29			26			29
Available licensed beds⁽¹⁾	1,189			1,299			1,189			1,299			1,189			1,309			1,189			1,309
Admissions⁽¹⁾	5,455			6,017			10,849			11,853			5,370			6,400			16,219			18,253
Patient days⁽¹⁾	77,415			86,525			154,305			169,341			79,232			89,454			233,537			258,795
Average length of stay (days)⁽¹⁾	14			14			14			14			15			14			15			14
Net revenue per patient day⁽¹⁾⁽²⁾	$	1,608		$	1,635		$	1,615		$	1,634		$	1,582		$	1,724		$	1,604		$	1,665
Occupancy rate⁽¹⁾	73		%	75		%	74		%	76		%	72		%	75		%	73		%	75		%
Percent patient days—Medicare⁽¹⁾	54		%	50		%	54		%	51		%	53		%	53		%	54		%	51		%
Outpatient rehabilitation data:
Number of clinics owned—start of period	1,449			1,407			1,447			1,423			1,435			1,419			1,447			1,423
Number of clinics acquired	11			10			14			14			—			3			14			17
Number of clinic start-ups	10			11			18			22			8			14			26			36
Number of clinics closed/sold	(35		)	(9		)	(44		)	(40		)	(23		)	(7		)	(67		)	(47		)
Number of clinics owned—end of period	1,435			1,419			1,435			1,419			1,420			1,429			1,420			1,429
Number of clinics managed—end of period	203			276			203			276			229			278			229			278
Total number of clinics (all)—end of period	1,638			1,695			1,638			1,695			1,649			1,707			1,649			1,707
Number of visits⁽¹⁾	2,144,655			2,203,505			4,212,120			4,257,988			2,039,462			2,204,328			6,251,582			6,462,316
Net revenue per visit⁽¹⁾⁽³⁾	$	103		$	102		$	103		$	103		$	103		$	103		$	103		$	103
Concentra data:
Number of centers owned—start of period	531			525			312			524			527			526			312			524
Number of centers acquired	—			4			219			5			1			1			220			6
Number of centers closed/sold	(4		)	(3		)	(4		)	(3		)	(3		)	(4		)	(7		)	(7		)
Number of centers owned—end of period	527			526			527			526			525			523			525			523
Number of onsite clinics operated—end of period	123			129			123			129			123			131			123			131
Number of CBOCs owned—end of period	31			33			31			33			30			32			30			32
Number of visits⁽¹⁾	3,024,121			3,103,089			5,620,180			6,014,696			2,984,832			3,150,903			8,605,012			9,165,599
Net revenue per visit⁽¹⁾⁽³⁾	$	125		$	121		$	125		$	122		$	124		$	120		$	124		$	122


(1)	Data excludes locations managed by the Company. For purposes of our Concentra segment, onsite clinics and community-based outpatient clinics are excluded.


(2)	Net revenue per patient day is calculated by dividing direct patient service revenues by the total number of patient days.


(3)	Net revenue per visit is calculated by dividing direct patient service revenue by the total number of visits. For purposes of this computation for our Concentra segment, direct patient service revenue does not include onsite clinics and community-based outpatient clinics.

Results of Operations

The following table outlines selected operating data as a percentage of net operating revenues for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2019		2018		2019		2018		2019		2018		2019
Net operating revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of services, exclusive of depreciation and amortization⁽¹⁾	84.5		84.5		84.8		85.0		85.8		84.9		85.1		84.9
General and administrative	2.3		2.3		2.4		2.2		2.4		2.5		2.4		2.3
Depreciation and amortization	3.9		4.0		3.8		4.0		3.9		3.8		3.9		4.0
Income from operations	9.3		9.2		9.0		8.8		7.9		8.8		8.6		8.8
Loss on early retirement of debt	—		—		(0.4	)	—		—		(1.3	)	(0.3	)	(0.5	)
Equity in earnings of unconsolidated subsidiaries	0.4		0.5		0.4		0.5		0.4		0.5		0.4		0.5
Non-operating gain	0.5		—		0.2		0.2
Gain on sale of businesses									0.2		—		0.2		0.2
Interest expense	(3.9	)	(3.8	)	(3.8	)	(3.8	)	(4.0	)	(3.9	)	(3.8	)	(3.9	)
Income before income taxes	6.3		5.9		5.4		5.7		4.5		4.1		5.1		5.1
Income tax expense	1.6		1.5		1.3		1.5		1.1		0.9		1.2		1.2
Net income	4.7		4.4		4.1		4.2		3.4		3.2		3.9		3.9
Net income attributable to non-controlling interests	1.1		1.1		1.0		1.0		0.8		1.0		0.9		1.0
Net income attributable to Holdings and Select	3.6	%	3.3	%	3.1	%	3.2	%
Net income attributable to Select Medical Holdings Corporation									2.6	%	2.2	%	3.0	%	2.9	%

_______________________________________________________________________________


(1)	Cost of services includes salaries, wages and benefits, operating supplies, lease and rent expense, and other operating costs.

The following table summarizes selected financial data by segment for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,								Three Months Ended September 30,								Nine Months Ended September 30,
	2018⁽²⁾			2019			% Change		2018⁽²⁾			2019			% Change		2018⁽²⁾			2019			% Change		2018⁽²⁾			2019			% Change
	(in thousands)																(in thousands)
Net operating revenues:
Critical illness recovery hospital	$	442,452		$	461,143		4.2	%	$	907,128		$	918,677		1.3	%	$	420,108		$	462,892		10.2	%	$	1,327,236		$	1,381,569		4.1	%
Rehabilitation hospital	144,779			160,374			10.8		288,087			314,932			9.3		144,588			173,369			19.9		432,675			488,301			12.9
Outpatient rehabilitation	253,914			261,891			3.1		498,145			508,796			2.1		245,234			265,330			8.2		743,379			774,126			4.1
Concentra	412,823			413,451			0.2		768,939			809,772			5.3		404,481			421,900			4.3		1,173,420			1,231,672			5.0
Other⁽¹⁾	42,242			64,505			52.7		86,875			133,818			54.0		52,990			69,852			31.8		139,865			203,670			45.6
Total Company	$	1,296,210		$	1,361,364		5.0	%	$	2,549,174		$	2,685,995		5.4	%	$	1,267,401		$	1,393,343		9.9	%	$	3,816,575		$	4,079,338		6.9	%
Income (loss) from operations:
Critical illness recovery hospital	$	48,773		$	49,643		1.8	%	$	110,687		$	111,190		0.5	%	$	42,156		$	44,763		6.2	%	$	152,843		$	155,953		2.0	%
Rehabilitation hospital	22,180			23,272			4.9		43,234			42,667			(1.3	)	19,264			29,546			53.4		62,498			72,213			15.5
Outpatient rehabilitation	35,243			35,593			1.0		59,131			57,552			(2.7	)	27,934			33,153			18.7		87,065			90,705			4.2
Concentra	46,774			50,841			8.7		80,277			91,428			13.9		43,499			52,922			21.7		123,776			144,350			16.6
Other⁽¹⁾	(32,409		)	(34,467		)	(6.4	)	(64,170		)	(66,231		)	(3.2	)	(33,016		)	(37,478		)	(13.5	)	(97,186		)	(103,709		)	(6.7	)
Total Company	$	120,561		$	124,882		3.6	%	$	229,159		$	236,606		3.2	%	$	99,837		$	122,906		23.1	%	$	328,996		$	359,512		9.3	%
Adjusted EBITDA:
Critical illness recovery hospital	$	60,725		$	64,138		5.6	%	$	133,697		$	137,136		2.6	%	$	53,292		$	57,247		7.4	%	$	186,989		$	194,383		4.0	%
Rehabilitation hospital	28,195			29,968			6.3		54,971			55,765			1.4		25,343			36,780			45.1		80,314			92,545			15.2
Outpatient rehabilitation	41,947			42,584			1.5		72,472			71,575			(1.2	)	34,531			40,040			16.0		107,003			111,615			4.3
Concentra	72,568			76,087			4.8		130,365			142,345			9.2		68,754			77,679			13.0		199,119			220,024			10.5
Other⁽¹⁾	(25,207		)	(26,544		)	(5.3	)	(50,045		)	(50,471		)	(0.9	)	(25,292		)	(29,081		)	(15.0	)	(75,337		)	(79,552		)	(5.6	)
Total Company	$	178,228		$	186,233		4.5	%	$	341,460		$	356,350		4.4	%	$	156,628		$	182,665		16.6	%	$	498,088		$	539,015		8.2	%
Adjusted EBITDA margins:
Critical illness recovery hospital	13.7		%	13.9		%			14.7		%	14.9		%			12.7		%	12.4		%			14.1		%	14.1		%
Rehabilitation hospital	19.5			18.7					19.1			17.7					17.5			21.2					18.6			19.0
Outpatient rehabilitation	16.5			16.3					14.5			14.1					14.1			15.1					14.4			14.4
Concentra	17.6			18.4					17.0			17.6					17.0			18.4					17.0			17.9
Other⁽¹⁾	N/M			N/M					N/M			N/M					N/M			N/M					N/M			N/M
Total Company	13.7		%	13.7		%			13.4		%	13.3		%			12.4		%	13.1		%			13.1		%	13.2		%
Total assets:
Critical illness recovery hospital	$	1,828,038		$	2,119,574				$	1,828,038		$	2,119,574				$	1,785,336		$	2,116,512				$	1,785,336		$	2,116,512
Rehabilitation hospital	867,175			1,107,852					867,175			1,107,852					888,342			1,121,260					888,342			1,121,260
Outpatient rehabilitation	979,678			1,265,487					979,678			1,265,487					991,105			1,280,712					991,105			1,280,712
Concentra	2,174,931			2,447,387					2,174,931			2,447,387					2,201,869			2,366,227					2,201,869			2,366,227
Other⁽¹⁾	114,978			166,640					114,978			166,640					113,529			270,045					113,529			270,045
Total Company	$	5,964,800		$	7,106,940				$	5,964,800		$	7,106,940				$	5,980,181		$	7,154,756				$	5,980,181		$	7,154,756
Purchases of property and equipment:
Critical illness recovery hospital	$	12,849		$	14,488				$	23,321		$	24,648				$	8,134		$	12,254				$	31,455		$	36,902
Rehabilitation hospital	8,080			5,356					20,997			18,539					8,769			5,293					29,766			23,832
Outpatient rehabilitation	8,018			6,705					15,356			15,745					7,209			7,476					22,565			23,221
Concentra	10,121			12,240					16,742			27,938					12,539			8,240					29,281			36,178
Other⁽¹⁾	2,963			1,423					5,232			2,415					2,740			1,408					7,972			3,823
Total Company	$	42,031		$	40,212				$	81,648		$	89,285				$	39,391		$	34,671				$	121,039		$	123,956


(1)	Other includes our corporate administration and shared services, as well as employee leasing services with our non-consolidating subsidiaries. Total assets include certain non-consolidating joint ventures and minority investments in other healthcare related businesses.

(2)

For the three and ~~six~~nine months ended ~~June~~September 30, 2018, the financial results of our reportable segments have been changed to remove the net operating revenues and expenses associated with employee leasing services provided to our non-consolidating subsidiaries. These results are now reported as part of our other activities. We lease employees at cost to these non-consolidating subsidiaries.

N/M — Not meaningful.

Three Months Ended ~~June~~September 30, 2019, Compared to Three Months Ended ~~June~~September 30, 2018

In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, gain on sale of businesses, interest expense, income taxes, and net income attributable to non-controlling interests.

Net Operating Revenues

Our net operating revenues increased 9.9% to $1,393.3 million for the three months ended September 30, 2019, compared to $1,267.4 million for the three months ended September 30, 2018.

Critical Illness Recovery Hospital Segment. Net operating revenues increased 10.2% to $462.9 million for the three months ended September 30, 2019, compared to $420.1 million for the three months ended September 30, 2018. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased 5.8% to 258,089 days for the three months ended September 30, 2019, compared to 243,891 days for the three months ended September 30, 2018. The acquisition of three hospitals during 2019 contributed to the increase in patient days. We also experienced a 2.9% increase in patient days in our existing hospitals, which was offset in part by a decrease in patient days from the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. For the three months ended September 30, 2019, our net revenue per patient day increased 4.0% to $1,773, as compared to $1,705 for the three months ended September 30, 2018. The increase is primarily driven by an increase in our Medicare net revenue per patient day.

Rehabilitation Hospital Segment. Net operating revenues increased 19.9% to $173.4 million for the three months ended September 30, 2019, compared to $144.6 million for the three months ended September 30, 2018. Our patient days increased 12.9% to 89,454 days for the three months ended September 30, 2019, compared to 79,232 days for the three months ended September 30, 2018. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations. We also experienced a 4.0% increase in patient days within our existing hospitals. Our net revenue per patient day increased 9.0% to $1,724 for the three months ended September 30, 2019, compared to $1,582 for the three months ended September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues increased 8.2% to $265.3 million for the three months ended September 30, 2019, compared to $245.2 million for the three months ended September 30, 2018. The increase in net operating revenues was attributable to an increase in visits, which increased 8.1% to 2,204,328 for the three months ended September 30, 2019, compared to 2,039,462 visits for the three months ended September 30, 2018. The increase in visits was due to new outpatient rehabilitation clinics and a 7.2% increase in visits within our existing clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since September 30, 2018, which contributed 24,146 visits during the three months ended September 30, 2018. During the three months ended September 30, 2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. Our net revenue per visit was $103 for both the three months ended September 30, 2019 and 2018.

Concentra Segment. Net operating revenues increased 4.3% to $421.9 million for the three months ended September 30, 2019, compared to $404.5 million for the three months ended September 30, 2018. The increase in net operating revenues was attributable to an increase in visits, offset in part by a decrease in net revenue per visit. Visits increased 5.6% to 3,150,903 visits for the three months ended September 30, 2019, compared to 2,984,832 visits for the three months ended September 30, 2018. Net revenue per visit was $120 for the three months ended September 30, 2019, compared to $124 for the three months ended September 30, 2018. The decrease in net revenue per visit was principally due to an increase in employer services visits, which yield lower per visits rates.

Operating Expenses

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $1,217.5 million, or 87.4% of net operating revenues, for the three months ended September 30, 2019, compared to $1,117.0 million, or 88.2% of net operating revenues, for the three months ended September 30, 2018. Our cost of services, a major component of which is labor expense, was $1,183.1 million, or 84.9% of net operating revenues, for the three months ended September 30, 2019, compared to $1,087.1 million, or 85.8% of net operating revenues, for the three months ended September 30, 2018. The decrease in our operating expenses relative to our net operating revenues was principally due to the improved operating performance of our rehabilitation hospital and Concentra segments during the three months ended September 30, 2019. General and administrative expenses were $34.4 million, or 2.5% of net operating revenues, for the three months ended September 30, 2019, compared to $30.0 million, or 2.4% of net operating revenues, for the three months ended September 30, 2018.

Adjusted EBITDA

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased 7.4% to $57.2 million for the three months ended September 30, 2019, compared to $53.3 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 12.4% for the three months ended September 30, 2019, compared to 12.7% for the three months ended September 30, 2018. The increase in Adjusted EBITDA for our critical illness recovery hospital segment was primarily driven by increases in patient volumes and net revenue per patient day, as discussed above under “Net Operating Revenues.” The decrease in our Adjusted EBITDA margin resulted from our newly acquired hospitals operating at lower margins than our other critical illness recovery hospitals.

Rehabilitation Hospital Segment. Adjusted EBITDA increased 45.1% to $36.8 million for the three months ended September 30, 2019, compared to $25.3 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 21.2% for the three months ended September 30, 2019, compared to 17.5% for the three months ended September 30, 2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin were primarily attributable to improved patient volume and net revenue per patient day within several of our existing hospitals, as discussed above under “Net Operating Revenues.”

Outpatient Rehabilitation Segment. Adjusted EBITDA increased 16.0% to $40.0 million for the three months ended September 30, 2019, compared to $34.5 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 15.1% for the three months ended September 30, 2019, compared to 14.1% for the three months ended September 30, 2018. Our Adjusted EBITDA and Adjusted EBITDA margin increased principally from increased patient volumes in our existing outpatient rehabilitation clinics, allowing these clinics to operate at lower relative costs, as well as other cost reductions we have achieved.

Concentra Segment. Adjusted EBITDA increased 13.0% to $77.7 million for the three months ended September 30, 2019, compared to $68.8 million for the three months ended September 30, 2018. Our Adjusted EBITDA margin for the Concentra segment was 18.4% for the three months ended September 30, 2019, compared to 17.0% for the three months ended September 30, 2018. The increase in Adjusted EBITDA margin resulted principally from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.

Depreciation and Amortization

Depreciation and amortization expense was $52.9 million for the three months ended September 30, 2019, compared to $50.5 million for the three months ended September 30, 2018. The increase principally occurred within our critical illness recovery hospital and rehabilitation hospital segments.

Income from Operations

For the three months ended September 30, 2019, we had income from operations of $122.9 million, compared to $99.8 million for the three months ended September 30, 2018. The increase in income from operations resulted principally from our rehabilitation hospital and Concentra segments.

Loss on Early Retirement of Debt

The amendment to the Select credit agreement, the amendment to the Concentra first lien credit agreement, the repayment of term loans outstanding under the Concentra second lien credit agreement, and the redemption of the 6.375% senior notes resulted in losses on early retirement of debt totaling $18.6 million for the three months ended September 30, 2019.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the three months ended September 30, 2019, we had equity in earnings of unconsolidated subsidiaries of $7.0 million, compared to $5.4 million for the three months ended September 30, 2018. The increase in equity in earnings was principally attributable to the growth of certain of our non-consolidating subsidiaries, which resulted from our sales of outpatient rehabilitation clinics to these subsidiaries.

Gain on Sale of Businesses

We recognized a gain of $2.1 million during the three months ended September 30, 2018. The gain was principally attributable to the sale of outpatient rehabilitation clinics to a non-consolidating subsidiary.

Interest Expense

Interest expense was $54.3 million for the three months ended September 30, 2019, compared to $50.7 million for the three months ended September 30, 2018. The increase in interest expense was principally due to the recognition of interest expense on both the 6.250% senior notes and the 6.375% senior notes during August 2019, as the redemption of the 6.375% senior notes occurred on August 30, 2019, while the issuance of the $550.0 million 6.250% senior notes occurred on August 1, 2019.

Income Taxes

We recorded income tax expense of $12.8 million for the three months ended September 30, 2019, which represented an effective tax rate of 22.6%. We recorded income tax expense of $14.1 million for the three months ended September 30, 2018, which represented an effective tax rate of 24.8%. The decrease in the effective tax rate resulted from a lower estimate of state and local income taxes.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was $13.3 million for the three months ended September 30, 2019, compared to $9.8 million for the three months ended September 30, 2018. The increase was principally due to the improved operating performance of our Concentra segment.

Nine Months Ended September 30, 2019, Compared to Nine Months Ended September 30, 2018

In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, ~~non-operating~~ gain on sale of businesses, interest expense, income taxes, and net income attributable to non-controlling ~~interests, which, in each case, are the same for Holdings and Select.~~interests.

Net Operating Revenues

Our net operating revenues increased ~~5.0%~~6.9% to ~~$1,361.4~~$4,079.3 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$1,296.2~~$3,816.6 million for the ~~three~~nine months ended ~~June~~September 30, 2018.

Critical Illness Recovery Hospital Segment. Net operating revenues increased ~~4.2%~~4.1% to ~~$461.1~~$1,381.6 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$442.5~~$1,327.2 million for the ~~three~~nine months ended ~~June~~September 30, 2018. The increase in net operating revenues was due to increases in both patient volume and net revenue per patient day. Our patient days increased ~~2.6%~~1.7% to ~~262,860~~779,078 days for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~256,132~~765,863 days for the ~~three~~nine months ended ~~June~~September 30, 2018. The ~~increase in patient days was principally due to the~~ acquisition of three hospitals during 2019 contributed to the ~~three months ended June 30, 2019,~~increase in patient days. We also experienced an increase in patient days in our existing hospitals, which was offset ~~in part~~ by a decrease in patient days from hospital closures which occurred during 2018, including the temporary closure of our hospital located in Panama City, Florida as a result of damage sustained from Hurricane Michael in October 2018. ~~For the three months ended June 30, 2019, our net~~Net revenue per patient day increased ~~1.7%~~2.4% to ~~$1,739, as~~$1,757 for the nine months ended September 30, 2019, compared to ~~$1,710~~$1,716 for the ~~three~~nine months ended ~~June~~September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Rehabilitation Hospital Segment. Net operating revenues increased ~~10.8%~~12.9% to ~~$160.4~~$488.3 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$144.8~~$432.7 million for the ~~three~~nine months ended ~~June~~September 30, 2018. The increase in net operating revenues resulted from both an increase in patient volumes and net revenue per patient day during the nine months ended September 30, 2019. Our patient days increased ~~11.8%~~10.8% to ~~86,525~~258,795 days for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~77,415~~233,537 days for the ~~three~~nine months ended ~~June~~September 30, 2018. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations. We also experienced ana 3.0% increase in patient days ~~within~~in our existing hospitals. Our net revenue per patient day increased ~~1.7%~~3.8% to ~~$1,635~~$1,665 for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$1,608~~$1,604 for the ~~three~~nine months ended ~~June~~September 30, 2018. We experienced increases in both our Medicare and non-Medicare net revenue per patient day.

Outpatient Rehabilitation Segment. Net operating revenues increased ~~3.1%~~4.1% to ~~$261.9~~$774.1 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$253.9~~$743.4 million for the ~~three~~nine months ended ~~June~~September 30, 2018. The increase in net operating revenues was ~~principally~~ attributable to an increase in visits, which increased ~~2.7%~~3.4% to ~~2,203,505~~6,462,316 for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~2,144,655~~6,251,582 visits for the ~~three~~nine months ended ~~June~~September 30, 2018. The increase in visits was due to ~~growth within both our existing~~new outpatient rehabilitation clinics and ~~new outpatient rehabilitation~~a 5.0% increase in visits within our existing clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since ~~June~~September 30, ~~2018. These clinics~~2018, which contributed ~~69,295~~192,149 visits during the ~~three~~nine months ended ~~June~~September 30, 2018. During the ~~three~~nine months ended ~~June~~September 30, 2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our net revenue per visit was ~~$102~~$103 for both the ~~three~~nine months ended ~~June~~September 30, 2019 ~~compared to $103 for the three months ended June 30,~~and 2018.

Concentra Segment. Net operating revenues increased 5.0% to ~~$413.5~~$1,231.7 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$412.8~~$1,173.4 million for the ~~three~~nine months ended ~~June~~September 30, 2018. Visits in our centers increased ~~2.6%~~6.5% to ~~3,103,089 visits~~9,165,599 for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~3,024,121~~8,605,012 visits for the ~~three~~nine months ended ~~June~~September 30, 2018. The increases in net operating revenues and visits were principally due to U.S. HealthWorks, which we acquired on February 1, 2018, and other newly acquired centers. Net revenue per visit was ~~$121~~$122 for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$125~~$124 for the ~~three~~nine months ended ~~June~~September 30, 2018. The decrease in net revenue per visit was principally due to an ~~increased proportion of~~increase in employer ~~service~~services visits, which yield lower per ~~visit~~visits rates.

~~Other.~~ Net operating revenues increased to $64.5 million for the three months ended June 30, 2019, compared to $42.2 million for the three months ended June 30, 2018. These net operating revenues are attributable to the employee leasing services we provide to certain of our non-consolidating subsidiaries. The increase in net operating revenues was due to both new employee leasing arrangements entered into since June 30, 2018, as well as increased services provided under existing employee leasing arrangements.

Operating Expenses

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were ~~$1,181.5~~$3,559.8 million, or ~~86.8%~~87.2% of net operating revenues, for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$1,123.9~~$3,338.6 million, or ~~86.8%~~87.5% of net operating revenues, for the ~~three~~nine months ended ~~June~~September 30, 2018. Our cost of services, a major component of which is labor expense, was ~~$1,150.2~~$3,465.4 million, or ~~84.5%~~84.9% of net operating revenues, for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$1,094.7~~$3,247.6 million, or ~~84.5%~~85.1% of net operating revenues, for the ~~three~~nine months ended ~~June~~September 30, 2018. ~~Our~~The decrease in our operating expenses relative to our net operating revenues ~~were adversely impacted by an increase in expenses incurred by~~was principally due to the operating performance of our ~~start-up~~Concentra and rehabilitation ~~hospitals during the three months ended June 30, 2019.~~hospital segments. General and administrative expenses were ~~$31.3~~$94.4 million, or 2.3% of net operating revenues, for the ~~three~~nine months ended ~~June~~September 30, ~~2019, compared to $29.2~~2019. General and administrative expenses were $91.0 million, or ~~2.3%~~2.4% of net operating revenues, for the ~~three~~nine months ended ~~June~~September 30, 2018. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition costs for the nine months ended September 30, 2018.

Adjusted EBITDA

Critical Illness Recovery Hospital Segment. Adjusted EBITDA increased ~~5.6%~~4.0% to ~~$64.1~~$194.4 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$60.7~~$187.0 million for the ~~three~~nine months ended ~~June~~September 30, 2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was ~~13.9%~~14.1% for both the ~~three~~nine months ended ~~June~~September 30, 2019 ~~compared to 13.7% for the three months ended June 30,~~and 2018. The increase in Adjusted EBITDA for our critical illness recovery hospital segment was primarily driven by increases in patient volumes and net revenue per patient day, as discussed above under “Net Operating Revenues.”

Rehabilitation Hospital Segment. Adjusted EBITDA increased ~~6.3%~~15.2% to ~~$30.0~~$92.5 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$28.2~~$80.3 million for the ~~three~~nine months ended ~~June~~September 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was ~~18.7%~~19.0% for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~19.5%~~18.6% for the ~~three~~nine months ended ~~June~~September 30, 2018. The ~~increase~~increases in Adjusted EBITDA ~~was~~and Adjusted EBITDA margin are primarily attributable to ~~an increase~~increases in patient volume and net revenue per visit at several of our existing hospitals. ~~Our Adjusted EBITDA and Adjusted EBITDA margins were adversely impacted by Adjusted EBITDA losses in our start-up hospitals.~~ Adjusted EBITDA start-up losses were ~~$6.0~~$8.8 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$2.1~~$3.8 million for the ~~three~~nine months ended ~~June~~September 30, 2018.

Outpatient Rehabilitation Segment. Adjusted EBITDA increased ~~1.5%~~4.3% to ~~$42.6~~$111.6 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$41.9~~$107.0 million for the ~~three~~nine months ended ~~June~~September 30, 2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was ~~16.3%~~14.4% for both the ~~three~~nine months ended ~~June~~September 30, 2019 ~~compared to 16.5% for the three months ended June 30,~~and 2018. For the ~~three~~nine months ended ~~June~~September 30, 2019, ~~our~~the increase in Adjusted EBITDA ~~increased as a result of~~resulted principally from our start-up and newly ~~acquired and~~ developed outpatient rehabilitation clinics. ~~Our Adjusted EBITDA margin was adversely impacted by increases in employee costs relative to our net operating revenues during the three months ended June 30, 2019.~~

Concentra Segment. Adjusted EBITDA increased ~~4.8%~~10.5% to ~~$76.1~~$220.0 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$72.6~~$199.1 million for the ~~three~~nine months ended ~~June~~September 30, 2018, which included the operating results of U.S. HealthWorks beginning February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was ~~18.4%~~17.9% for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~17.6%~~17.0% for the ~~three~~nine months ended ~~June~~September 30, 2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.

~~Other.~~ The Adjusted EBITDA loss was $26.5 million for the three months ended June 30, 2019, compared to an Adjusted EBITDA loss of $25.2 million for the three months ended June 30, 2018. The increase in our Adjusted EBITDA loss was due to an increase in general and administrative costs, which encompass our corporate shared service activities.

Depreciation and Amortization

Depreciation and amortization expense was ~~$55.0~~$160.1 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$51.7~~$149.0 million for the ~~three~~nine months ended June 30, 2018. The increase principally occurred within our critical illness recovery hospital segment. During the three months ended June 30, 2019, certificate of need regulations were repealed in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Florida critical illness recovery hospitals were fully amortized during the three months ended June 30, 2019.

~~Income from Operations~~

For the three months ended June 30, 2019, we had income from operations of $124.9 million, compared to $120.6 million for the three months ended June 30, 2018. The increase in income from operations resulted principally from our Concentra segment.

~~Equity in Earnings of Unconsolidated Subsidiaries~~

Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the three months ended June 30, 2019, we had equity in earnings of unconsolidated subsidiaries of $7.4 million, compared to $4.8 million for the three months ended June 30, 2018. The increase in equity in earnings was principally attributable to the growth of certain non-consolidating subsidiaries as a result of our sales of outpatient rehabilitation clinics to these subsidiaries.

~~Non-Operating Gain~~

We recognized a non-operating gain of $6.5 million during the three months ended June 30, 2018. The non-operating gain was principally attributable to the sale of outpatient rehabilitation clinics to a non-consolidating subsidiary.

~~Interest Expense~~

Interest expense was $51.5 million for the three months ended June 30, 2019, compared to $50.2 million for the three months ended June 30, 2018. The increase in interest expense was principally due to an increase in the variable interest rates associated with the Concentra credit facilities.

~~Income Taxes~~

We recorded income tax expense of $20.8 million for the three months ended June 30, 2019, which represented an effective tax rate of 25.8%. We recorded income tax expense of $21.1 million for the three months ended June 30, 2018, which represented an effective tax rate of 25.8%.

~~Net Income Attributable to Non-Controlling Interests~~

Net income attributable to non-controlling interests was $15.2 million for the three months ended June 30, 2019, compared to $14.0 million for the three months ended June 30, 2018. The increase was principally due to the improved operating performance of our Concentra segment.

~~Six Months Ended June 30, 2019, Compared to Six Months Ended June 30, 2018~~

In the following, we discuss our results of operations related to net operating revenues, operating expenses, Adjusted EBITDA, depreciation and amortization, income from operations, loss on early retirement of debt, equity in earnings of unconsolidated subsidiaries, non-operating gain, interest expense, income taxes, and net income attributable to non-controlling interests, which, in each case, are the same for Holdings and Select.

~~Net Operating Revenues~~

~~Our net operating revenues increased 5.4% to $2,686.0 million for the six months ended June 30, 2019, compared to $2,549.2 million for the six months ended June 30, 2018.~~

~~Critical Illness Recovery Hospital Segment.~~ Net operating revenues increased 1.3% to $918.7 million for the six months ended June 30, 2019, compared to $907.1 million for the six months ended June 30, 2018. The primary cause of the increase in net operating revenues was due to increases in both our Medicare and non-Medicare net revenue per patient day. Net revenue per patient day increased 1.6% to $1,749 for the six months ended June 30, 2019, compared to $1,721 for the six months ended June 30, 2018. Our patient days were 520,989 days for the six months ended June 30, 2019, compared to 521,972 days for the six months ended June 30, 2018.

~~Rehabilitation Hospital Segment.~~ Net operating revenues increased 9.3% to $314.9 million for the six months ended June 30, 2019, compared to $288.1 million for the six months ended June 30, 2018. The increase in net operating revenues resulted primarily from an increase in patient volumes during the six months ended June 30, 2019. Our patient days increased 9.7% to 169,341 days for the six months ended June 30, 2019, compared to 154,305 days for the six months ended June 30, 2018. The increase in patient days was principally driven by our rehabilitation hospitals which recently commenced operations. We also experienced an increase in patient days in our existing hospitals. Our net revenue per patient day increased 1.2% to $1,634 for the six months ended June 30, 2019, compared to $1,615 for the six months ended June 30, 2018.

~~Outpatient Rehabilitation Segment.~~ Net operating revenues increased 2.1% to $508.8 million for the six months ended June 30, 2019, compared to $498.1 million for the six months ended June 30, 2018. The increase in net operating revenues was principally due to an increase in visits, which increased 1.1% to 4,257,988 for the six months ended June 30, 2019, compared to 4,212,120 visits for the six months ended June 30, 2018. The increase in visits was due to growth within both our existing clinics and new outpatient rehabilitation clinics. This growth was offset in part by the sale of outpatient rehabilitation clinics to non-consolidating subsidiaries since June 30, 2018. These clinics contributed 168,003 visits during the six months ended June 30, 2018. During the six months ended June 30, 2019, we also experienced an increase in management fee revenues related to services provided to our non-consolidating subsidiaries. These services have expanded as a result of our sales of clinics to these non-consolidating subsidiaries. Our net revenue per visit was $103 for both the six months ended June 30, 2019 and 2018.

~~Concentra Segment.~~ Net operating revenues increased 5.3% to $809.8 million for the six months ended June 30, 2019, compared to $768.9 million for the six months ended June 30, 2018. Visits in our centers increased 7.0% to 6,014,696 for the six months ended June 30, 2019, compared to 5,620,180 visits for the six months ended June 30, 2018. The increases in net operating revenues and visits were principally due to U.S. HealthWorks, which we acquired on February 1, 2018. Net revenue per visit was $122 for the six months ended June 30, 2019, compared to $125 for the six months ended June 30, 2018. The decrease in net revenue per visit was principally due to an increased proportion of employer service visits, which yield lower per visit rates.

~~Other.~~ Net operating revenues increased to $133.8 million for the six months ended June 30, 2019, compared to $86.9 million for the six months ended June 30, 2018. These net operating revenues are attributable to the employee leasing services we provide to certain of our non-consolidating subsidiaries. The increase in net operating revenues was due to both new employee leasing arrangements entered into since June 30, 2018, as well as increased services provided under existing employee leasing arrangements.

~~Operating Expenses~~

Our operating expenses consist principally of cost of services and general and administrative expenses. Our operating expenses were $2,342.3 million, or 87.2% of net operating revenues, for the six months ended June 30, 2019, compared to $2,221.5 million, or 87.2% of net operating revenues, for the six months ended June 30, 2018. Our cost of services, a major component of which is labor expense, was $2,282.2 million, or 85.0% of net operating revenues, for the six months ended June 30, 2019, compared to $2,160.5 million, or 84.8% of net operating revenues, for the six months ended June 30, 2018. Our operating expenses, relative to our net operating revenues, were adversely impacted by an increase in expenses incurred by our start-up rehabilitation hospitals. General and administrative expenses were $60.0 million, or 2.2% of net operating revenues, for the six months ended June 30, 2019. General and administrative expenses were $61.0 million, or 2.4% of net operating revenues, for the six months ended June 30, 2018. General and administrative expenses included $2.9 million of U.S. HealthWorks acquisition costs for the six months ended June 30, 2018.

~~Adjusted EBITDA~~

~~Critical Illness Recovery Hospital Segment.~~ Adjusted EBITDA increased 2.6% to $137.1 million for the six months ended June 30, 2019, compared to $133.7 million for the six months ended June 30, 2018. Our Adjusted EBITDA margin for the critical illness recovery hospital segment was 14.9% for the six months ended June 30, 2019, compared to 14.7% for the six months ended June 30, 2018. The increase in Adjusted EBITDA for our critical illness recovery hospital segment was primarily driven by an increase in net revenue per patient day, as discussed above under “~~Net Operating Revenues~~.”

~~Rehabilitation Hospital Segment.~~ Adjusted EBITDA increased 1.4% to $55.8 million for the six months ended June 30, 2019, compared to $55.0 million for the six months ended June 30, 2018. Our Adjusted EBITDA margin for the rehabilitation hospital segment was 17.7% for the six months ended June 30, 2019, compared to 19.1% for the six months ended June 30, 2018. The increase in Adjusted EBITDA was primarily attributable to an increase in patient volume at several of our existing hospitals. The decrease in Adjusted EBITDA margin for our rehabilitation hospital segment was primarily driven by Adjusted EBITDA losses in our start-up hospitals during the six months ended June 30, 2019. Adjusted EBITDA start-up losses were $8.8 million for the six months ended June 30, 2019, compared to $3.0 million for the six months ended June 30, 2018.

~~Outpatient Rehabilitation Segment.~~ Adjusted EBITDA was $71.6 million for the six months ended June 30, 2019, compared to $72.5 million for the six months ended June 30, 2018. Our Adjusted EBITDA margin for the outpatient rehabilitation segment was 14.1% for the six months ended June 30, 2019, compared to 14.5% for the six months ended June 30, 2018. For the six months ended June 30, 2019, our Adjusted EBITDA and Adjusted EBITDA margin were adversely impacted by increases in employee costs relative to our net operating revenues.

~~Concentra Segment.~~ Adjusted EBITDA increased 9.2% to $142.3 million for the six months ended June 30, 2019, compared to $130.4 million for the six months ended June 30, 2018, which included the operating results of U.S. HealthWorks beginning February 1, 2018. Our Adjusted EBITDA margin for the Concentra segment was 17.6% for the six months ended June 30, 2019, compared to 17.0% for the six months ended June 30, 2018. The increases in Adjusted EBITDA and Adjusted EBITDA margin resulted from achieving lower relative operating costs across our combined Concentra and U.S. HealthWorks businesses.

~~Other.~~ ~~The Adjusted EBITDA loss was $50.5 million for the six months ended June 30, 2019, compared to an Adjusted EBITDA loss of $50.0 million for the six months ended June 30, 2018.~~

~~Depreciation and Amortization~~

~~Depreciation and amortization expense was $107.1 million for the six months ended June 30, 2019, compared to $98.5 million for the six months ended June~~September 30, 2018. The increase principally occurred within our Concentra and critical illness recovery hospital segments. The increase in our Concentra segment was principally due to the acquisition of U.S. HealthWorks, which we acquired on February 1, 2018. The increase in our critical illness recovery hospital segment was principally due to the repeal of certificate of need regulations in the state of Florida effective July 1, 2019; accordingly, the certificate of need intangible assets for our Florida critical illness recovery hospitals were fully amortized during the ~~six~~nine months ended ~~June~~September 30, 2019.

Income from Operations

For the ~~six~~nine months ended ~~June~~September 30, 2019, we had income from operations of ~~$236.6~~$359.5 million, compared to ~~$229.2~~$329.0 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase in income from operations resulted principally from our Concentra ~~segment.~~

and rehabilitation hospital segments.

Loss on Early Retirement of Debt

During the ~~six~~nine months ended ~~June~~September 30, 2019, the amendment to the Select credit agreement, the amendment to the Concentra first lien credit agreement, the repayment of term loans outstanding under the Concentra second lien credit agreement, and the redemption of the 6.375% senior notes resulted in losses on early retirement of debt totaling $18.6 million.

During the nine months ended September 30, 2018, we amended both ~~Select’s senior secured~~the Select credit ~~facilities~~agreement and ~~Concentra’s~~the Concentra first lien credit agreement which resulted in losses on early retirement of debt of $10.3 ~~million during the six months ended June 30, 2018.~~million.

Equity in Earnings of Unconsolidated Subsidiaries

Our equity in earnings of unconsolidated subsidiaries principally relates to rehabilitation businesses in which we are a minority owner. For the ~~six~~nine months ended ~~June~~September 30, 2019, we had equity in earnings of unconsolidated subsidiaries of ~~$11.8~~$18.7 million, compared to ~~$9.5~~$14.9 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase in equity in earnings was principally attributable to the growth of certain non-consolidating subsidiaries as a result of our sales of outpatient rehabilitation clinics to these subsidiaries.

~~Non-Operating~~ Gain on Sale of Businesses

We recognized ~~non-operating~~ gains of $6.5 million and ~~$6.9~~$9.0 million during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. The ~~non-operating~~ gains were principally attributable to sales of outpatient rehabilitation clinics to non-consolidating subsidiaries.

Interest Expense

Interest expense was ~~$102.3~~$156.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$97.3~~$148.0 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase in interest expense was principally due an increase in variable interest rates associated with the Concentra credit ~~facilities. We also experienced an increase in interest expense due to~~facilities and an increase in our indebtedness as a result of the acquisition of U.S. HealthWorks on February 1, 2018. We also recognized interest expense on both the 6.250% senior notes and the 6.375% senior notes during August 2019, as the redemption of the 6.375% senior notes occurred on August 30, 2019, while the issuance of the $550.0 million 6.250% senior notes occurred on August 1, 2019.

Income Taxes

We recorded income tax expense of ~~$39.3~~$52.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019, which represented an effective tax rate of ~~25.7%~~24.9%. We recorded income tax expense of ~~$33.4~~$47.5 million for the ~~six~~nine months ended ~~June~~September 30, 2018, which represented an effective tax rate of ~~24.2%~~24.4%. For the ~~six~~nine months ended ~~June~~September 30, 2018,, the lower effective tax rate resulted principally from the discrete tax benefits realized from certain equity interests redeemed at our Concentra ~~subsidiary and completed in connection with the closing of the U.S. HealthWorks acquisition on February 1, 2018.~~subsidiary.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests was ~~$27.7~~$41.0 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$24.3~~$34.1 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The increase was principally due to the improved operating performance of our Concentra ~~segment. During the six months ended June 30, 2018, Concentra incurred costs associated with the acquisition~~segment and several of ~~U.S. HealthWorks and the amendment of Concentra’s first lien credit agreement.~~our joint venture rehabilitation hospitals.

Liquidity and Capital Resources

Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and ~~Six~~Nine Months Ended ~~June~~September 30, 2018

In the following, we discuss cash flows from operating activities, investing activities, and financing ~~activities, which, in each case, are the same for Holdings and Select.~~activities.


	Six Months Ended June 30,						Nine Months Ended September 30,
	2018			2019			2018			2019
	(in thousands)						(in thousands)
Cash flows provided by operating activities	$	216,950		$	132,914		$	380,977		$	266,640
Cash flows used in investing activities	(595,971		)	(227,479		)	(646,542		)	(270,710		)
Net cash provided by financing activities	397,501			43,423
Cash flows provided by (used in) financing activities							303,429			(35,145		)
Net increase (decrease) in cash and cash equivalents	18,480			(51,142		)	37,864			(39,215		)
Cash and cash equivalents at beginning of period	122,549			175,178			122,549			175,178
Cash and cash equivalents at end of period	$	141,029		$	124,036		$	160,413		$	135,963

Operating activities provided ~~$132.9~~$266.6 million of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$217.0~~$381.0 million of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2018. The lower operating cash flows for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to the ~~six~~nine months ended ~~June~~September 30, 2018, was principally driven by the change in our accounts receivable. We experienced an increase in days sales outstanding to 53 days at ~~June~~September 30, 2019, compared to 51 days at December 31, 2018. We experienced a decline in days sales outstanding to 54 days at ~~June~~September 30, 2018, compared to 58 days at December 31, 2017. Our days sales outstanding will fluctuate based upon variability in our collection cycles. Our days sales outstanding fell within our expected range at ~~June~~September 30, 2019 and December 31, 2018.

Investing activities used ~~$227.5~~$270.7 million of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2019. The principal uses of cash were ~~$89.3~~$124.0 million for purchases of property and equipment and ~~$138.3~~$146.9 million for investments in and acquisitions of businesses. Investing activities used ~~$596.0~~$646.5 million of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2018. The principal uses of cash were $515.0 million related to the acquisition of U.S. HealthWorks and ~~$81.6~~$121.0 million for purchases of property and equipment.

Financing activities ~~provided $43.4~~used $35.1 million of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2019. The principal ~~source~~sources of cash ~~was net~~were from the issuance of $550.0 million 6.250% senior notes, $500.0 million of incremental term loan borrowings ~~of $175.0 million~~ under the Select ~~revolving facility. This was offset~~credit facilities, and $100.0 million of incremental term loan borrowings under the Concentra first lien credit agreement. These borrowings resulted in net proceeds of $1,132.9 million. A portion of the net proceeds of the senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities, were used to redeem in full Select’s $710.0 million 6.375% senior notes at a redemption price of 100.000% of the principal amount. The proceeds from the incremental term loans under the Concentra first lien credit agreement were used, in part, byto repay the $240.0 million of term loans outstanding under the Concentra second lien credit agreement. We also used $98.8 million and $33.9 million of cash for mandatory prepayments of term loans under the Select credit facilities and Concentra credit facilities, respectively. During the nine months ended September 30, 2019, we had net repayments of $20.0 million under the Select revolving facility.

Financing activities provided ~~$397.5~~$303.4 million of cash flows for the ~~six~~nine months ended ~~June~~September 30, 2018. The principal source of cash was from the issuance of term loans under the Concentra credit facilities which resulted in net proceeds of $779.9 million. This was offset in part by ~~$301.2~~$306.4 million of distributions to non-controlling interests, of which $294.9 million related to the redemption and reorganization transactions executed in connection with the acquisition of U.S. HealthWorks, and ~~$80.0~~$165.0 million of net repayments under the Select revolving facility.

Capital Resources

Working capital. We had net working capital of ~~$175.4~~$180.5 million at ~~June~~September 30, 2019, compared to $287.3 million at December 31, 2018. The decrease in net working capital was principally due to the recognition of current operating lease liabilities upon the adoption of ASC Topic 842, Leases, on January 1, ~~2019.~~2019, offset in part by an increase in our accounts receivable.

Select credit facilities.

In February 2019, Select made a principal prepayment of $98.8 million associated with its term loans in accordance with the provision in the Select credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Select credit facilities.

At June 30, 2019, Select had outstanding borrowings under the Select credit facilities consisting of $1,031.1 million in Select term loans (excluding unamortized discounts and debt issuance costs of $17.3 million) and borrowings of $195.0 million (excluding letters of credit) under the Select revolving facility. At June 30, 2019, Select had $216.6 million of availability under the Select revolving facility after giving effect to $38.4 million of outstanding letters of credit.

On August 1, 2019, Select entered into Amendment No. 3 to the Select credit agreement dated March 6, 2017. ~~Among~~Amendment No. 3, among other things, ~~the amendment~~ (i) provided for an additional $500.0 million in term loans that, along with the existing ~~Select~~ term ~~loan,~~loans, have a maturity date of March 6, 2025, (ii) extended the maturity date of ~~Select’s~~the Select revolving ~~credit~~ facility from March 6, 2022 to March 6, 2024, and (iii) increased the total net leverage ratio permitted under the Select credit agreement.

At September 30, 2019, Select had outstanding borrowings under the Select credit facilities consisting of $1,531.1 million in Select term loans (excluding unamortized discounts and debt issuance costs of $22.2 million). Select did not have any borrowings under the Select revolving facility. At September 30, 2019, Select had $411.7 million of availability under the Select revolving facility after giving effect to $38.3 million of outstanding letters of credit.

Select 6.250% senior notes.

On August 1, 2019, Select issued and sold $550.0 million aggregate principal amount of 6.250% senior notes due August 15, 2026. Select ~~intends to use~~used a portion of the net proceeds of the 6.250% senior notes, together with a portion of the proceeds from the incremental term loan borrowings under the Select credit facilities (as described above), in part to (i) redeem in full ~~Select’s $710~~the $710.0 million aggregate principal amount of the 6.375% senior notes ~~due 2021, to~~on August 30, 2019 at the redemption price of 100.000% of the principal amount plus accrued and unpaid interest, (ii) repay in full the outstanding borrowings under Select’s revolving ~~credit~~ facility, and (iii) pay related fees and expenses associated with the financing.

Concentra credit facilities. Select and Holdings are not parties to the Concentra credit facilities and are not obligors with respect to Concentra’s debt under such agreements. While this debt is non-recourse to Select and Holdings, it is included in ~~Select’s~~our consolidated financial statements.

In February 2019, Concentra Inc. made a principal prepayment of $33.9 million associated with its term loans in accordance with the provision in the Concentra credit facilities that requires mandatory prepayments of term loans as a result of annual excess cash flow, as defined in the Concentra credit facilities.

At ~~June~~September 30, 2019, Concentra Inc. had outstanding borrowings under the Concentra credit facilities consisting of ~~$1,380.3~~$1,240.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of ~~$18.0~~$12.7 million). Concentra Inc. did not have any borrowings under the Concentra revolving facility. At ~~June~~September 30, 2019, Concentra Inc. had $87.3 million of availability under its revolving facility after giving effect to $12.7 million of outstanding letters of credit.

Stock Repurchase Program. Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program has been extended until December 31, ~~2019,~~2020, and will remain in effect until then, unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate. Holdings funds this program with cash on hand and borrowings under the Select revolving facility. During the ~~six~~nine months ended ~~June~~September 30, 2019, Holdings repurchased ~~902,313~~2,165,221 shares at a cost of approximately ~~$13.1~~$33.2 million, an average cost per share of ~~$14.55,~~$15.32, which includes transaction costs. Since the inception of the program through ~~June~~September 30, 2019, Holdings has repurchased ~~36,826,441~~38,089,349 shares at a cost of approximately ~~$327.9~~$347.9 million, or ~~$8.90~~$9.13 per share, which includes transaction costs.

Liquidity. We believe our internally generated cash flows and borrowing capacity under the Select and Concentra credit facilities will be sufficient to finance operations over the next twelve months. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases or exchanges, if any, may be funded from operating cash flows or other sources and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Use of Capital Resources. We may from time to time pursue opportunities to develop new joint venture relationships with significant health systems and other healthcare providers. We also intend to open new outpatient rehabilitation clinics and occupational health centers in local areas that we currently serve where we can benefit from existing referral relationships and brand awareness to produce incremental growth. In addition to our development activities, we may grow through opportunistic acquisitions.

Recent Accounting Pronouncements

Refer to Note 2 – Accounting Policies of the notes to our condensed consolidated financial statements included herein for information regarding recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk in connection with our variable rate long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under the Select credit facilities and Concentra credit facilities.

At ~~June~~September 30, 2019, Select had outstanding borrowings under the Select credit facilities consisting of ~~$1,031.1~~$1,531.1 million in Select term loans (excluding unamortized discounts and debt issuance costs of ~~$17.3~~$22.2 million) ~~and borrowings of $195.0 million (excluding letters of credit) under the Select revolving facility,~~, which bear interest at variable rates. Select did not have any borrowings under the Select revolving facility.

At ~~June~~September 30, 2019, Concentra Inc. had outstanding borrowings under the Concentra credit facilities consisting of ~~$1,380.3~~$1,240.3 million of Concentra term loans (excluding unamortized discounts and debt issuance costs of ~~$18.0~~$12.7 million), which bear interest at variable rates. Concentra Inc. did not have any borrowings under the Concentra revolving facility.

As of ~~June~~September 30, 2019, each 0.25% increase in market interest rates will impact the interest expense on Select’s and ~~Concentra’s~~Concentra Inc.’s variable rate debt by ~~$6.5~~$6.9 million per annum.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, as of ~~June~~September 30, 2019, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, including the accumulation and communication of disclosure to our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding disclosure, are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the relevant SEC rules and forms.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the ~~second~~third quarter ended ~~June~~September 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Evansville Litigation. On October 19, 2015, the plaintiff‑relators filed a Second Amended Complaint in United States of America, ex rel. Tracy Conroy, Pamela Schenk and Lisa Wilson v. Select Medical Corporation, Select Specialty Hospital-Evansville, LLC (“SSH‑Evansville”), Select Employment Services, Inc., and Dr. Richard Sloan. The case is a civil action filed in the United States District Court for the Southern District of Indiana by private plaintiff‑relators on behalf of the United States under the federal False Claims Act. The plaintiff‑relators are the former CEO and two former case managers at SSH‑Evansville, and the defendants currently include the Company, SSH‑Evansville, a subsidiary of the Company serving as common paymaster for its employees, and a physician who practices at SSH‑Evansville. The plaintiff‑relators allege that SSH‑Evansville discharged patients too early or held patients too long, improperly discharged patients to and readmitted them from short stay hospitals, up‑coded diagnoses at admission, and admitted patients for whom long‑term acute care was not medically necessary. They also allege that the defendants engaged in retaliation in violation of federal and state law. The Second Amended Complaint replaced a prior complaint that was filed under seal on September 28, 2012 and served on the Company on February 15, 2013, after a federal magistrate judge unsealed it on January 8, 2013. All deadlines in the case had been stayed after the seal was lifted in order to allow the government time to complete its investigation and to decide whether or not to intervene. On June 19, 2015, the United States Department of Justice notified the District Court of its decision not to intervene in the case.

The Company intends to vigorously defend these actions, but at this time the Company is unable to predict the timing and outcome of this matter.

ITEM 1A. RISK FACTORS

There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

Holdings’ board of directors has authorized a common stock repurchase program to repurchase up to $500.0 million worth of shares of its common stock. The program, which has been extended until December 31, ~~2019,~~2020, will remain in effect until then unless further extended or earlier terminated by the board of directors. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as Holdings deems appropriate.

The following table provides information regarding repurchases of our common stock during the three months ended ~~June~~September 30, 2019.

Total Number of
Shares Purchased⁽¹⁾

Average Price
Paid Per Share⁽¹⁾
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
April 1 - April 30, 2019 33,939
$ 14.58
—
$ 185,249,408
May 1 - May 31, 2019 731,703
14.62
731,703
174,548,606
June 1 - June 30, 2019 170,610
14.21
170,610
172,124,038
Total 936,252
$ 14.55
902,313
$ 172,124,038



	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
July 1 - July 31, 2019	—	$	—	—	$	172,124,038
August 1 - August 31, 2019	1,473,676	15.85		1,242,256	152,417,000
September 1 - September 30, 2019	20,652	16.01		20,652	152,086,459
Total	1,494,328	$	15.85	1,262,908	$	152,086,459


(1)	Includes share repurchases under our common stock repurchase program and common stock surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted shares issued to employees, pursuant to the provisions of our equity incentive plans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Number		Description
4.1		Indenture, dated as of August 1, 2019, by and among Select Medical Corporation, the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed on August 1, 2019).
4.2		Forms of 6.250% Senior Notes due 2026 (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K, filed on August 1, 2019).
10.1		Amendment No. 5,3, dated ~~April 8,~~August 1, 2019, to the Credit Agreement, dated March 6, 2017, by and among Select Medical Holdings Corporation, Select Medical Corporation, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the other lenders and issuing banks party thereto, as amended by Amendment No. 1, dated as of March 22, 2018, and Amendment No. 2, dated as of October 26, 2018 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on August 1, 2019).
10.2		Amendment No. 6, dated September 20, 2019, to the First Lien Credit Agreement, dated as of June 1, 2015, among Concentra Holdings Inc., MJ Acquisition Corporation, Concentra Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, as amended by Amendment No. 1, dated as of September 26, 2016, Amendment No. 2, dated as of March 20, 2017, Amendment No. 3, dated as of February 1, 2018, ~~and~~ Amendment No. 4, dated as of October 26, 2018, and Amendment No. 5, dated as of April 8, 2019 (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed on ~~April 11,~~September 24, 2019).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer, and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the ~~Registrants have~~Registrant has duly caused this Report to be signed on ~~their~~its behalf by the undersigned, thereunto duly authorized.



	~~SELECT MEDICAL CORPORATION~~


	~~By:~~	~~/s/ Martin F. Jackson~~
		~~Martin F. Jackson~~
		~~Executive Vice President and Chief Financial Officer~~
		~~(Duly Authorized Officer)~~

	~~By:~~	~~/s/ Scott A. Romberger~~
		~~Scott A. Romberger~~
		~~Senior Vice President, Chief Accounting Officer and Controller~~
		~~(Principal Accounting Officer)~~

~~Dated: August 1, 2019~~



	SELECT MEDICAL HOLDINGS CORPORATION


	By:	/s/ Martin F. Jackson
		Martin F. Jackson
		Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer)

	By:	/s/ Scott A. Romberger
		Scott A. Romberger
		Senior Vice President, Chief Accounting Officer and Controller
		(Principal Accounting Officer)

Dated: ~~August 1,~~October 31, 2019

6155



	For the Six Months Ended June 30, 2019

	Select Medical Corporation Stockholders
	Common Stock Issued	Common Stock Par Value		Capital in Excess of Par		Accumulated Deficit			Total Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at December 31, 2018	0	$	0	$	970,156	$	(167,114	)	$	803,042		$	113,198		$	916,240
Net income attributable to Select Medical Corporation						40,834			40,834						40,834
Net income attributable to non-controlling interests									—			4,810			4,810
Contribution related to restricted stock award issuances by Holdings				5,488					5,488						5,488
Issuance of non-controlling interests									—			6,837			6,837
Distributions to and purchases of non-controlling interests				259					259			(2,739		)	(2,480		)
Redemption adjustment on non-controlling interests						(47,470		)	(47,470		)				(47,470		)
Other						(122		)	(122		)	413			291
Balance at March 31, 2019	0	$	0	$	975,903	$	(173,872	)	$	802,031		$	122,519		$	924,550
Net income attributable to Select Medical Corporation						44,816			44,816						44,816
Net income attributable to non-controlling interests									—			3,663			3,663
Additional investment by Holdings				459					459						459
Dividends declared and paid to Holdings						(13,620		)	(13,620		)				(13,620		)
Contribution related to restricted stock award issuances by Holdings				5,591					5,591						5,591
Issuance of non-controlling interests				6,366					6,366			24,761			31,127
Distributions to and purchases of non-controlling interests				14					14			(1,430		)	(1,416		)
Redemption adjustment on non-controlling interests						270			270						270
Other						82			82			428			510
Balance at June 30, 2019	0	$	0	$	988,333	$	(142,324	)	$	846,009		$	149,941		$	995,950



	Select (Parent Company Only)			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Non-Guarantor Concentra		Consolidating and Eliminating Adjustments				Consolidated Select Medical Corporation
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	78		$	7,576	$	3,256		$	113,126	$	—			$	124,036
Accounts receivable	—			445,484		129,946			216,339		—				791,769
Intercompany receivables	—			1,702,313		147,990			—		(1,850,303		)	(a)	—
Prepaid income taxes	142			5,936		8			6,838		(606		)	(f)	12,318
Other current assets	29,306			32,072		9,923			28,641		—				99,942
Total Current Assets	29,526			2,193,381		291,123			364,944		(1,850,909		)		1,028,065
Operating lease right-of-use assets	33,568			441,710		513,796			307,623		(325,312		)	(a)	971,385
Property and equipment, net	28,578			658,686		114,256			207,035		—				1,008,555
Investment in affiliates	4,543,196			175,551		—			—		(4,718,747		)	(b)(c)	—
Goodwill	—			2,150,658		—			1,234,736		—				3,385,394
Identifiable intangible assets, net	3			98,033		4,676			316,623		—				419,335
Other assets	34,285			236,642		16,524			16,426		(9,671		)	(e)	294,206
Total Assets	$	4,669,156		$	5,954,661	$	940,375		$	2,447,387	$	(6,904,639	)		$	7,106,940
LIABILITIES AND EQUITY
Current Liabilities:
Overdrafts	$	27,259		$	—	$	—		$	—	$	—			$	27,259
Current operating lease liabilities	6,419			102,709		39,896			67,155		(13,695		)	(a)	202,484
Current portion of long-term debt and notes payable	6,376			524		192			1,920		—				9,012
Accounts payable	14,227			80,569		22,931			20,288		—				138,015
Intercompany payables	1,702,313			147,990		—			—		(1,850,303		)	(a)	—
Accrued payroll	7,498			95,373		4,579			39,947		—				147,397
Accrued vacation	5,086			67,198		15,767			34,226		—				122,277
Accrued interest	5,282			35		6			4,911		—				10,234
Accrued other	63,952			64,262		14,735			41,298		—				184,247
Income taxes payable	8,333			3,082		47			911		(606		)	(f)	11,767
Total Current Liabilities	1,846,745			561,742		98,153			210,656		(1,864,604		)		852,692
Non-current operating lease liabilities	30,244			363,883		455,165			251,521		(286,910		)	(a)	813,903
Long-term debt, net of current portion	1,918,283			9,473		55,050			1,366,896		—				3,349,702
Non-current deferred tax liability	—			100,310		1,359			55,718		(9,671		)	(e)	147,716
Other non-current liabilities	27,875			63,035		3,235			33,117		(24,707		)	(a)	102,555
Total Liabilities	3,823,147			1,098,443		612,962			1,917,908		(2,185,892		)		5,266,568
Redeemable non-controlling interests	—			—		—			17,432		826,990			(d)	844,422
Stockholders’ Equity:
Common stock	0			—		—			—		—				0
Capital in excess of par	988,333			—		—			—		—				988,333
Retained earnings (accumulated deficit)	(142,324		)	1,613,283		(24,651		)	45,806		(1,634,438		)	(c)(d)	(142,324		)
Subsidiary investment	—			3,242,935		352,064			460,757		(4,055,756		)	(b)(d)	—
Total Select Medical Corporation Stockholders’ Equity	846,009			4,856,218		327,413			506,563		(5,690,194		)		846,009
Non-controlling interests	—			—		—			5,484		144,457			(d)	149,941
Total Equity	846,009			4,856,218		327,413			512,047		(5,545,737		)		995,950
Total Liabilities and Equity	$	4,669,156		$	5,954,661	$	940,375		$	2,447,387	$	(6,904,639	)		$	7,106,940